The Park Company is affected by the following contingencies at the end of 2014: 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 2014?
A) $ 750,000
B) $ 850,000
C) $3,500,000
D) $3,850,000

Question

The Park Company is affected by the following contingencies at the end of 2014: 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 2014?
A) $ 750,000
B) $ 850,000
C) $3,500,000
D) $3,850,000

Quizplus · Accepted Answer

The total amount that Parks should accrue for loss contingencies in 2014 is $750,000. This includes the $500,000 for the probable lawsuit damages and the $250,000 for the likely uncollectible pledged receivables. The expropriation of foreign assets is reasonably possible but not probable, so no accrual is required. The inability of the major customer to repay the note receivable is remotely possible, so no accrual is required.

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