On November 5, 2011, a Timp Rental truck was in an accident with an auto driven by Fred Meyer. Timp Rental received notice on January 12, 2012, of a lawsuit for $700,000 damages for personal injuries suffered by Meyer. Timp Rental's counsel believes it is probable that Meyer will be awarded an estimated amount in the range between $200,000 and $450,000, and that $300,000 is a better estimate of potential liability than any other amount. Timp's accounting year ends on December 31, and the 2011 financial statements were issued on March 2, 2012. What amount of loss should Timp accrue at December 31, 2011?

Question

Quizplus · Accepted Answer

Timp Rental should accrue for the most likely amount of loss, which in this case is estimated to be $300,000. This amount falls within the range of $200,000 to $450,000, and is the best estimate of potential liability. Since Timp Rental received notice of the lawsuit after the end of the year, it is still necessary to accrue for this loss in accordance with accounting rules. Therefore, the correct amount of loss to accrue at December 31, 2011, is $300,000.

On November 5, 2011, a Timp Rental Truck Was in an Accident