KLR Oil Company is being investigated, following an explosion on one of their oil rigs. They have multiple prior citations for safety violations, and this explosion killed several workers. The related damages are still unknown and cannot be reasonably estimated. What accounting treatment should KLR use for the investigation?
A)Because damages are still unknown, no action is necessary.
B)Because the likelihood of the obligation occurring is remote, footnote disclosure is all that is required.
C)Because the likelihood of the obligation occurring is probable, but the amount is unknown, this should be disclosed in the footnotes.
D)Because the likelihood of the obligation occurring is reasonably possible, this should be disclosed in the footnotes.

Question

Quizplus · Accepted Answer

According to the accounting standard ASC 450-20, when the likelihood of an obligation occurring is probable, it should be recognized as a liability and disclosed in the financial statements. In this case, the investigation is being conducted due to safety violations and an explosion resulting in the deaths of several workers. Therefore, it is probable that KLR Oil Company will have an obligation to pay damages. However, since the amount is still uncertain, it should be disclosed in the footnotes. Choice A and B are incorrect because ASC 450-20 requires recognition when the likelihood of an obligation is probable, regardless of the amount involved. Choice D is incorrect because the likelihood of the obligation occurring is more than just reasonably possible based on the given facts.

KLR Oil Company Is Being Investigated, Following an Explosion on One