ABC Inc.has 50 pending lawsuits for which it may be found liable.The expected value (sum of the probabilities of the outcomes multiplied by their respective payouts)amounts to $100,000.However,the company's controller believes that the most likely outcome will be a payout of $120,000.Which of the following statements pertaining to the accrual of the provision is correct?
A) There is a large population of lawsuits, so a provision of $100,000 must be accrued.
B) There is a large population of lawsuits, so a provision of $120,000 must be accrued.
C) There is a small population of lawsuits, so a provision of $100,000 must be accrued.
D) There is a small population of lawsuits, so a provision of $120,000 must be accrued.

Question

Quizplus · Accepted Answer

The controller believes that the most likely outcome is a payout of $120,000, and this is the value that should be accrued for each lawsuit. While the expected value for all 50 lawsuits is $100,000, it is important to base the accrual on the most likely outcome for each individual lawsuit, rather than averaging across all 50 cases. Option A and C are incorrect because the size of the population of lawsuits is not the determining factor in the accrual of the provision. Option D is incorrect because, given the information provided, the provision should be based on the $120,000 most likely payout, not an expected value of $100,000 for a small population of lawsuits.

ABC IncHas 50 Pending Lawsuits for Which It May Be Found