Strong Security Systems’ revenues for 2014 totaled $25.8 million. As with most companies Strong is a defendant in lawsuits related to its products. Note 14 of the Strong annual report for 2014 reported the following:
14. Contingencies
The company is involved in various legal proceedings.... It is the Company’s policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and an amount is reasonably estimable.

1. Suppose Strong’s lawyers believe that a significant legal judgment against the company is reasonably possible. How should Strong report this situation in its financial statements?
2. Suppose Strong’s lawyers believe it is probable that a $2.1 million judgment will be rendered against the company. Report this situation in Strong’s financial statements. Journalize any entry requirements by GAAP. Explanations are not required.

  • CreatedJuly 25, 2014
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