Question

1.Jackson owns a building where he rents to tenants. Robertson is suing Jackson for 350,000 for an injury he sustained while living in the building. The attorneys performed estimates of the value of the lawsuit and outcomes below: Based upon the facts and potential outcomes below; how will Jackson handle each probability. A, Assume it is likely that Jackson will win the lawsuit with the amount being 240,000 B. Assume it probable that Jackson will settle the lawsuit for an amount between 300K-500K C. Assume it is reasonably possible that Jackson will settle the lawsuit for $375,000.

Answer 1

A. The accounting standard does not allow the recognition of contingent gains prior to settlement.

However, If the gain is contingent it is allowed to disclose the nature in the notes of financial statement.

B. If it is probable that Jackson will loose the case and needs to settle it for 300k-500k , then Jackson need to account for the loss in the Financial Statement.

The loss he needs to record is the maximum i.e.500k.

C. If the likelihood of loss is reasonably possible, not probable, only disclosure in notes if Financial statement is required with the amount rather than actual recognition.