The Park Company is affected by the following contingencies at the end of 2016:
1) Expropriation of Park's foreign assets, valued at $3,000,000, appears reasonably possible.
2) Parks' legal counsel has concluded that it is probable that the company will be required to pay damages of $500,000 in a lawsuit.
3) It appears remotely possible that a major customer will be unable to repay Parks on a note receivable for $100,000.
4) Parks' controller estimates that $250,000 of the company's pledged receivables are likely to be uncollectible, and the lender will require Parks to honor the amounts.
What total amount should Parks accrue for loss contingencies in 2016?

Question

Quizplus · Accepted Answer

According to accounting principles, a company should accrue a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In this scenario, the probable lawsuit damages of $500,000 and the likely uncollectible pledged receivables of $250,000 meet these criteria, totaling $750,000. The expropriation and the note receivable issues are not accrued because they are not considered probable.

The Park Company Is Affected by the Following Contingencies at the End