The Marlborough Corp. is trying to decide how to record a loss contingency. It believes the likelihood of a payment is probable, but it believes that there is a range of possible amounts it will have to pay, from $4 million to $8 million. Each amount in the range is equally likely. Under GAAP, the accrual must be
A) $4 million
B) $6 million
C) $8 million
D) Any figure it wants between $4 and $8 million

Question

Quizplus · Accepted Answer

When a loss contingency is considered probable and the amount can be reasonably estimated but involves a range, GAAP requires the company to record the lowest amount in the range, which in this case is $4 million.