Question

Rich Networks Inc. is being sued by a competitor for infringing on one of its competitor's patents. The company’s fiscal year end date is December 31. The suit for $95,000 was filed in court on January 30, 2020 before the company expects to submit its 2019 annual report to its regulatory body on February 25, 2020. The company’s legal counsel estimates that the likelihood of damages being awarded to the competitor is 80%. How much contingent liabilities, if any, should be reported on the balance sheet in the company’s 2019 annual report? If you think that the amount is zero, put 0. Otherwise, if you think that the amount is above zero, put that number in your answer. Can you help me with this question please?

Answer 1

A contingent liability of $95,000 should be reported on the balance sheet in the company's 2019 annual report.

This is because there is a 80% likelihood of Rich Networks Inc. losing the case which means that it is more likely and reasonably certain that Rich Networks will lose this case and hence contingent liability should be disclosed for the whole amount, i.e., $95,000.

Since it is reasonably certain that Rich will loose this case and the amount can also be estimated, a liability could have been recognized however since the event did not exist as on the balance sheet date, i..e, 31st December, 2019, only a contingent liability is being disclosed.