A customer of RoughEdge Sharpeners alleges that RoughEdge's new razor sharpener had a defect that resulted in serious injury to the customer. RoughEdge believes the customer has a 51% chance of winning the case, and that if the customer wins the case, there is a range of losses of between $1,000,000 and $3,000,000 in which any number is equally likely to occur. Under U. S. GAAP, RoughEdge should accrue a liability in the amount of:A. $0B. $1,000,000C. $2,000,000D. $3,000,000

Question

Blaze Morris

Business

2 March, 05:50

A customer of RoughEdge Sharpeners alleges that RoughEdge's new razor sharpener had a defect that resulted in serious injury to the customer. RoughEdge believes the customer has a 51% chance of winning the case, and that if the customer wins the case, there is a range of losses of between $1,000,000 and $3,000,000 in which any number is equally likely to occur. Under U. S. GAAP, RoughEdge should accrue a liability in the amount of:A. $0B. $1,000,000C. $2,000,000D. $3,000,000

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Answers (1)

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Leonardo Tran · Answer 1

The answer is C. $2,000,000.

Explanation:

Under U. S. GAAP, the contingent liabilities is accured when it meets the two criteria: The event is likely to happen (that is, more than 50% of the chance that the liabilities will be assumed in the future) and it is possible to estimate the value of the liabilities.

Thus, liabilities in this case should be accrued (so A. is eliminated).

The amount of accruals will be determined by the below calculation:

0.5 x (1,000,000 + 3,000,000) = $2,000,000; because it is given that any amount of loss is equally likely to occur in the given range from $1,000,000 to $3,000,000.

So, the answer is C. $2,000,000.