Use the following to answer questions 33 and 34:
REFERENCE 11-02
Bugs, Inc., a wholly owned subsidiary of the U.S.-based company, Pillows Ltd., was notified of a loss contingency with an estimated cost ranging between $50,000 and $150,000. Bugs, Inc. hired an expert appraiser who assessed that all possible dollar amounts of liability in this range are equally likely. Management of Bugs, Inc. has estimated that there is a 60 percent chance that this contingency will result in an actual loss.
[QUESTION]
REFER TO: 11-02
-According to U.S.GAAP, what is the amount recognized by Bugs, Inc.as a provision for loss contingency?

Question

Quizplus · Accepted Answer

According to U.S. GAAP, a provision for a loss contingency is recognized when the loss is probable and the amount can be reasonably estimated. In this case, the loss is probable (60% chance) and the amount can be reasonably estimated (between $50,000 and $150,000). Therefore, Bugs, Inc. should recognize a provision for loss contingency of $50,000, which is the minimum amount of the estimated range.

Use the Following to Answer Questions 33 and 34