Question 1

Westfield Corp. has a contingent liability related to a lawsuit. The company's legal counsel believes there is a 60% probability that Westfield will lose the case and pay damages of $800,000. There is a 30% probability of paying $400,000, and a 10% probability of paying nothing.

Under ASC 450, how should Westfield account for this contingency?

Accepted Answer

Apply ASC 450 criteria: if loss is probable (>50%) and amount can be reasonably estimated, accrue the liability. Use the most likely amount when probabilities are given. Always disclose material contingencies.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Using expected value instead of most likely amount, treating 60% as 'reasonably possible' instead of 'probable', or accruing the minimum amount

How to approach this question

Full Answer

Common mistakes

Practice the full CPA FAR Practice Exam 2

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