On November 5,2014,a Longhaul Rental truck was in an accident with an auto driven by Alana Rodriguez.Longhaul Rental received notice on January 12,2015,of a lawsuit for $700,000 damages for personal injuries suffered by Rodriguez.Longhaul Rental's counsel believes it is probable that Rodriguez will be awarded an estimated amount in the range between $300,000 and $550,000,and that $400,000 is a better estimate of potential liability than any other amount.Longhaul's accounting year ends on December 31,and the 2014 financial statements were issued on March 2,2015.What amount of loss should Longhaul accrue at December 31,2014?

Question

Quizplus · Accepted Answer

Longhaul Rental should accrue the estimated liability of $400,000 as it is the best estimate of potential liability for the lawsuit. The fact that the financial statements were issued after the notice of the lawsuit is not relevant, as the accrual should be made at the end of the accounting year, regardless of when the financial statements are issued. Therefore, Option A is incorrect as accrual accounting requires recognition of expenses in the period they are incurred, not when the financial statements are issued. Option B and D are incorrect as they do not represent the best estimate of potential liability.

On November 5,2014,a Longhaul Rental Truck Was in an Accident