Away Travel filed suit against West Coast Travel seeking damages for copyright violations.Away Travel's legal counsel believes it is probable (but not certain)that Away Travel will win the lawsuit for an estimated amount in the range of $100,000 to $200,000,with all amounts in the range considered equally likely.How should Away Travel report this litigation?

Question

Quizplus · Accepted Answer

According to the accounting principles, a loss contingency such as a lawsuit must be recognized in the financial statements only if the likelihood of the loss occurring is probable and the amount can be reasonably estimated. In this case, the likelihood of winning the lawsuit is only probable (not certain) and the estimated amount is in a range with all amounts considered equally likely. Therefore, the litigation should only be disclosed in the notes to the financial statements and no receivable should be reported. Hence, option D is the best choice.

Away Travel Filed Suit Against West Coast Travel Seeking Damages