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    Examples of Contigent Liability

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    Unruh Co. is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Unruh's lawyer states that it is probable that Unruh will lose the suit and be found liable for a judgment costing Unruh anywhere from $800,000 to $4,000,000. However, the lawyer states that the most probable cost is $2,400,000. As a result of the above facts, how much should Unruh accrue for this liability?

    in March 2007, an explosion occurred at Bowe Co.'s plant, causing damage to area properties. By May 2007, no claims had yet been asserted against Bowe. However, Bowe's management and legal counsel concluded that it was reasonably possible that Bowe would be held responsible for negligence, and that $3,000,000 would be a reasonable estimate of the damages. Bowe's $4,000,000 comprehensive public liability policy contains a $200,000 deductible clause. In Bowe's December 31, 2006 financial statements, for which the auditor's fieldwork was completed in April 2007, how should this casualty be reported?

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    Solution Preview

    Unruh Co. - The lawyer estimate can be taken a reasonable estimate to make provision for contingent liability of $2,400,000. Lawyer are aware of what is the range of damages payable but with their experience ...

    Solution Summary

    The solution provides 2 examples of Unruh Co & Bowe Co's scenario related to damage to environment and illness to local resident.