Coastal Oil has three pending legal cases against it for environmental damages due to a recent spill. The company's legal counsel has determined that it is probable the company will lose a suit by the state for $8,000,000 to cover cleanup costs. It advises that there is a remote chance of losing a claim by a neighborhood association for $1,000,000 due to emotional distress over the condition of the coastline. The third claim of $500,000 for health issues arising from suspected water contamination is considered reasonably possible to be won by the claimants. The amount that Costal should record in its accounting records related to these suits is:
A)$8,000,000.
B)$8,500,000.
C)$9,000,000.
D)$9,500,000.
E)$0.

Question

Quizplus · Accepted Answer

Coastal Oil should record a liability for the probable loss of $8,000,000 related to the cleanup costs, as it is probable and can be reasonably estimated. The other claims are either remote or reasonably possible, which do not require recognition in the financial statements.

Coastal Oil Has Three Pending Legal Cases Against It for Environmental