Asbestos Corp. is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals. Asbestos's lawyer states that it is likely the corporation will lose the suit and be found liable for a judgement which may cost Asbestos anywhere from $ 300,000 to $ 1,500,000. However, the lawyer states that the most likely cost is $ 900,000. As a result of the above facts, using ASPE, Asbestos should accrue
A) a loss contingency of $ 300,000 and disclose an additional contingency of up to $ 1,200,000.
B) a loss contingency of $ 900,000 and disclose an additional contingency of up to $ 600,000.
C) a loss contingency of $ 900,000 but not disclose any additional contingency.
D) no loss contingency but disclose a contingency of $ 300,000 to $ 1,500,000.

Question

Quizplus · Accepted Answer

Based on the information provided, the most likely cost to Asbestos is $900,000, so the company should accrue a loss contingency of $900,000. However, the lawyer stated that the judgement could cost anywhere from $300,000 to $1,500,000, so Asbestos should disclose an additional contingency of up to $600,000 ($1,500,000 - $900,000 = $600,000). Therefore, the best choice is to accrue a loss contingency of $900,000 and disclose an additional contingency of up to $600,000, which is option B.