Mapplebeck Company Ltd. is gathering evidence to support an accrual for legal claims. Three lawsuits are outstanding:
Question:
Mapplebeck Company Ltd. is gathering evidence to support an accrual for legal claims. Three lawsuits are outstanding:
Claim 1 is a lawsuit from an employee for $750,000. According to the legal team, there is a 10% chance that it will have to be paid in full and a 90% chance that it will be dismissed.
Claim 2 is a lawsuit from a supplier for $5,000,000 for breach of contract. According to the legal team, there is a 70% chance that it will have to be paid out in full and a 30% chance that it will be dismissed.
Claim 3 is a lawsuit from a customer for $1,600,000. According to the legal team, there is only a 30% chance that it will be dismissed in court. Accordingly, the company has made a settlement offer of $1,000,000 to the plaintiff, but the plaintiff has not yet responded to the settlement offer. The legal team believes there is a 40% chance the settlement will be accepted. If it is not accepted, the action will go to court, with a 30% chance of dismissal and a 70% chance of an $1,600,000 payout.
Required:
For each case, indicate the amount that should be recorded as a liability for the lawsuit. Assume that the payment period is relatively short so that discounting is not needed.
Step by Step Answer:
Intermediate Accounting Volume 2
ISBN: 9781260881240
8th Edition
Authors: Thomas H. Beechy, Joan E. Conrod, Elizabeth Farrell, Ingrid McLeod-Dick, Kayla Tomulka, Romi-Lee Sevel