Question

6. Carpenter Company is being sued for $2,000,000 for an injury caused to a child as a result of alleged negligence while the child was visiting the Carpenter plant in March 2017. The suit was filed in July 2017. Carpenter’s lawyer states that it is probable that Carpenter will lose the suit and be found liable for a judgment costing anywhere from $200,000 to $900,000. The lawyer also states that the most probable judgment is somewhere around $400,000. Management of Carpenter is strongly opposed to disclosing this event within their financial statements. What would you recommend to your client Carpenter as to reporting the suit in its 2017 financial statements? Discuss the rationale for your answer. Also include any disclosures, if necessary, that should be made in the financial statements.   

Answer 1

Since the event of lawsuit being conducted is a contingent event, and it is probble that the company will lost the suit nd will have to pay the damages.

In the event of most probable contingent liability it is required that we make up for the loss by making a provision for the contingent liability and in the above case the company had to make a provision fo $400000.

It is also necessary to make a disclosure in the financial statements regarding the contingent liability, It's probable likelihood, amount of provision etc.