Case 13 08 Loss Contingency

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Case 13-08
Accounting for a Loss Contingency for a Verdict Overturned on Appeal
Facts of the Case
The scenario that present this case is a company faces litigation. I have to surmise how this liability will be reported as well as the resulting effects on the financial statements in the years presented. I will present some facts of this case, and by these facts I will resolve the primary accounting which in my opinion it could accrued the liability, disclose the liability or count it as immaterial. W Inc and your company have been engaged in litigation over a specific patent infringement matter. In May 2007, W filed a claim. On December 31 2007, your company determined that a loss in connection to the claim was probable. The company
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Even though the minimum amount in the range is not necessarily the amount of loss that will be ultimately determined, it is not likely that the ultimate loss will be less than the minimum amount. “
Based on this information M should record a liability in the amount of $17 million. This amount is determined with ASC 450-20-30-1. The journal entry would be:
Dr. Lawsuit Loss $17,000,000 Cr. Lawsuit Liability $17,000,000

Question 2
For the year-end December 31, 2009, financial statements, should M adjust its liability? If so, what amount should be recorded; and should the amount of the adjustment be considered a 2009 event or a prior period adjustment?
For the year ended December 31, 2009, financial statement M should adjust its liability to $18.5 million FASB 450-20-50-3 through 450-20-50-8 required disclosure of additional exposure to loss if there is a reasonable possibility that there are additional amount to be paid. The amount of the adjustment would be considered 2009 an event period adjustment.
FASB 450-20-50
50-3 Disclosure of the contingency shall be made if there is at least a reasonable possibility that a loss or an additional loss may have been incurred and either of the following conditions exists:
a. An accrual is not made for a loss contingency because any of the conditions in paragraph 450-20-25-2 are not met.
b. An exposure to loss

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