[Leo_Lee]

Hello every, I need some help to work this out…here is the question:

Knife Co. is currently involved in two lawsuits. One is a wrongful termination suit initiated by a former employee. It is reasonably possible there will be an unfavorable outcome for Knife in this lawsuit. The knife is also suing a competitor for patent infringement. It is probable there will be a favorable outcome for Knife in this lawsuit. The knife can reasonably estimate the number of damages from both lawsuits.

How should Knife account for potential damages awarded from each lawsuit in its financial statements at the end of the current year?

Wrongful termination lawsuit Patent infringement lawsuit

A.
Accrue Accrue

B.
Accrue Do not accrue

C.
Do not accrue Accrue

D.
Do not accrue Do not accrue

so the answer is D which is not accrued. what confused me is that the question already said wrongful termination lawsuit reasonably possible and also it said the both of damage can be estimated, then why do we still choose “not accrue” for termination lawsuit? shouldn’t this contingency event belong to the “Probable and estimable” part?

really appreciate your help. If there is anything wrong, please let me know, thank you soooo much!

Regards,
Leo

[Leo_Lee]

what comes to my mind is that the question said “reasonably estimate ” which does not mean estimate, so that's why we choose not accrued…

[monikernc]

You disclose but not accrue when reasonably possible and estimable.

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[Xuanor]

Since the loss is “reasonably possible”, the rules are you would disclose but not accrue the potential loss. Part of the reasoning is, you don't want to show a gain unnecessarily later if nothing comes of the lawsuit and you reverse out the contingent liability.

The potential award… you never record “contingent gains”. You don't have to disclose it either (but you can).

[Amber]

Yep that is correct. You dont accrue for reasonably possible. This got me a couple times too. You want to look for probable to accrue.

[RobOh]

One word can make all the difference. It's such a simple concept, but it's amazing how we sometimes read or see what we want to see. It is so important to pay attention to the details on the CPA exam. I've shared the attached youtube video (copy and paste the url below) with my staff as an exercise during a training as I have seen it at different trainings myself. It doesn't take long but don't read the solution beforehand if you haven't already seen this yourself.

[Author]

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