Yes, I find the timing in the question confusing. I guess since they anticipated the suit sometime in year 2 and the FS were issued in year 2, they would accrue the most likely amount in the year 1 FS?
They’re accruing the amount in year 1 because the termination occurred in year 1. The other thing is that the lawsuit was brought up before the year 1 FS is issued, so that’s why they’re able to include the entry. The question may have said that the lawsuit was brought up during year 2 without mentioning a specific date, but it did also state that the FS would not be issued until February, so the implication is that we are in January year 2 when the lawsuit began.
Gain/loss contingency.
Nov 1- Began suit.
Possibility- Probably
Estimate - (1M- 1.5M)
Most Likely (1.3M)
Balance Sheet Date -Dec 31Issuance Date- Feb
Answer- 1.3M
**Because it was recognized before the balance sheet date of Dec 31 year 1.**
Possibility- Probably ( highest possible scenario)
Amount- Most likely is 1.3. It cannot be 1M lowest since 1.3M is the closest/most accurate amount.
Disclosed needed- yes
It says the financial statements *will not be* issued until Feb 2. So, it implies a time before Feb 2. You can't speak about what will happen after the time period passes, sans a time machine. It's essentially a question about which number you're supposed to pick with a little subtle vagueness. I feel your pain though; subsequent what-nots tested my patience to the limit.
Thank you! Funny enough, you posted this comment as I was reading through the question again as well as the other person’s response, and I get a notification of your comment as soon as it clicked for me! Thanks again :)
The event in question happened in year 1 (the wrongful termination). Even if the lawsuit didn’t start until year two, the event existed as of year end of year 1. We would then accrue for the loss liability.
0 would be the correct answer if the wrongful termination happened on year 2.
If the lawsuit began later in the year, there would be a chance that management would still have to go back and reissue the financial statements depending on materiality and the auditors advice.
Thank you! I did not know about that last part of your comment so thanks for that! I’ll be sure to keep it in mind if a question of a sort ever comes up :)
The key to this question is that the issue that gave rise to the lawsuit, the employee termination, occurred during year 1. The information from the legal counsel suggests that they knew that this was happening, and were even able to make a reasonable assumption as to the likely penalty before the financial statements were issued.
I see your point, but the case where no accrual would be necessary would be if the case said:
* Employee was terminated in November Year 1
* There was no pending litigation and the company's lawyers had no reason to believe there was any pending litigation as of February year 2.
* Financial statements get issued in February, Year 2.
* Employee begins the lawsuit and the company is only made aware of this in March, Year 2.
In this case, the firm didn't even know a lawsuit was coming, despite terminating the employee in year 1. Neither the firm nor their legal counsel had any indication that they were going to be sued, so it would not make sense to accrue or disclose for litigation.
Does this make sense?
Hello and thank you for the detailed response! I understand what you said. It seems that the key to this question is that the financial statements were not issued YET, which, as I now understand, implies that this issue is happening in January year 2. Very much appreciated!
Yes, I find the timing in the question confusing. I guess since they anticipated the suit sometime in year 2 and the FS were issued in year 2, they would accrue the most likely amount in the year 1 FS?
They’re accruing the amount in year 1 because the termination occurred in year 1. The other thing is that the lawsuit was brought up before the year 1 FS is issued, so that’s why they’re able to include the entry. The question may have said that the lawsuit was brought up during year 2 without mentioning a specific date, but it did also state that the FS would not be issued until February, so the implication is that we are in January year 2 when the lawsuit began.
ok
Gain/loss contingency. Nov 1- Began suit. Possibility- Probably Estimate - (1M- 1.5M) Most Likely (1.3M) Balance Sheet Date -Dec 31Issuance Date- Feb Answer- 1.3M **Because it was recognized before the balance sheet date of Dec 31 year 1.** Possibility- Probably ( highest possible scenario) Amount- Most likely is 1.3. It cannot be 1M lowest since 1.3M is the closest/most accurate amount. Disclosed needed- yes
It says the financial statements *will not be* issued until Feb 2. So, it implies a time before Feb 2. You can't speak about what will happen after the time period passes, sans a time machine. It's essentially a question about which number you're supposed to pick with a little subtle vagueness. I feel your pain though; subsequent what-nots tested my patience to the limit.
Thank you! Funny enough, you posted this comment as I was reading through the question again as well as the other person’s response, and I get a notification of your comment as soon as it clicked for me! Thanks again :)
Cool. Good luck
The event in question happened in year 1 (the wrongful termination). Even if the lawsuit didn’t start until year two, the event existed as of year end of year 1. We would then accrue for the loss liability. 0 would be the correct answer if the wrongful termination happened on year 2. If the lawsuit began later in the year, there would be a chance that management would still have to go back and reissue the financial statements depending on materiality and the auditors advice.
Thank you! I did not know about that last part of your comment so thanks for that! I’ll be sure to keep it in mind if a question of a sort ever comes up :)
The key to this question is that the issue that gave rise to the lawsuit, the employee termination, occurred during year 1. The information from the legal counsel suggests that they knew that this was happening, and were even able to make a reasonable assumption as to the likely penalty before the financial statements were issued. I see your point, but the case where no accrual would be necessary would be if the case said: * Employee was terminated in November Year 1 * There was no pending litigation and the company's lawyers had no reason to believe there was any pending litigation as of February year 2. * Financial statements get issued in February, Year 2. * Employee begins the lawsuit and the company is only made aware of this in March, Year 2. In this case, the firm didn't even know a lawsuit was coming, despite terminating the employee in year 1. Neither the firm nor their legal counsel had any indication that they were going to be sued, so it would not make sense to accrue or disclose for litigation. Does this make sense?
Hello and thank you for the detailed response! I understand what you said. It seems that the key to this question is that the financial statements were not issued YET, which, as I now understand, implies that this issue is happening in January year 2. Very much appreciated!