Below are three independent situations:

a. In August, 2021 a worker was injured in the factory in an accident partially the result of his own negligence. The worker has sued Barkley Co. for $800,000. Counsel believes it is reasonably possible that the outcome of the suit will be unfavorable and that the settlement would cost the company from $250,000 to $500,000.
b. A suit for breach of contract seeking damages of $3,000,000 was filed by an author against Henderson Co. on October 4, 2018. Henderson's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff is between $1,000,000 and $2,250,000. No amount within this range is a better estimate of potential damages than any other amount.
c. Kroft is involved in a pending court case. Kroft’s lawyers believe it is probable that Kroft will be awarded damages of $1,000,000.

Should you accrue a liabiity in each situation?

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Answer:

a. In August, 2021 a worker was injured in the factory in an accident partially the result of his own negligence. The worker has sued Barkley Co. for $800,000. Counsel believes it is reasonably possible that the outcome of the suit will be unfavorable and that the settlement would cost the company from $250,000 to $500,000.

  • No liability should be recorded, only included in the footnotes. The liability is not probable, nor the amount can be determined.

b. A suit for breach of contract seeking damages of $3,000,000 was filed by an author against Henderson Co. on October 4, 2018. Henderson's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff is between $1,000,000 and $2,250,000. No amount within this range is a better estimate of potential damages than any other amount.

  • No liability should be recorded, only included in the footnotes. The liability is probable, but the amount cannot be determined.

c. Kroft is involved in a pending court case. Kroft’s lawyers believe it is probable that Kroft will be awarded damages of $1,000,000.

  • The liability must be recorded since the liability is probable and can be determined.

Liability is a type of debt that the business is required to pay at the present time or in any future date.

When is liability accrue?

a. The company would not be in condition to accrue the liability of paying injured labor due to his own negligence as the amount is not probably determined.

b. The company would again not have any accrued liability as liability has not yet been incurred.

c. The liability to pay for damages is probable which would be incurred in the future; thus, should be recorded in the accounts of the business.

Learn more about liability contracts here:

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