AccountingBLOCK - Tax and Accounting Forums - View Single Post - Contingent Liability Accrual

lt1776 · 12-03-2009, 11:59 AM

I am have been looking at a number of filings and I have a question about accruals. What is happening from an accounting perspective when a company states "we consider a loss from this lawsuit to be probable, and we have accrued $240,000 the amount of the agreed settlement"? HDY 2009 10-K

OR

"Additional contingent obligations, other than with respect to our existing operations, include potential product liability claims for products manufactured and sold before the disposal of our discontinued industrial segment in fiscal year 1989 and for guarantees of certain obligations of former subsidiaries. We have provided an accrual at June 30, 2009 related to the Beldray Lease Guarantee, as discussed above." from here

Are these companies creating a liability by expensing the amount of the accrual on the income statement?

Here is my inclination to what is happening:
Amount of the probable loss = 240,000

Expenses 240,000 Dr.
Accrued Expenses 240,000 Cr.

When the probable loss is actually realized:

Accrued Expenses 240,000 Dr.
Cash 240,000 Cr.

Can someone confirm if this is actually true, or if I am wrong?

12-03-2009, 11:59 AM	#1 (permalink)
lt1776 Status: n00b Join Date: Oct 2009 Posts: 10 Rep Power: 0	Contingent Liability Accrual - need help I am have been looking at a number of filings and I have a question about accruals. What is happening from an accounting perspective when a company states "we consider a loss from this lawsuit to be probable, and we have accrued $240,000 the amount of the agreed settlement"? HDY 2009 10-K OR "Additional contingent obligations, other than with respect to our existing operations, include potential product liability claims for products manufactured and sold before the disposal of our discontinued industrial segment in fiscal year 1989 and for guarantees of certain obligations of former subsidiaries. We have provided an accrual at June 30, 2009 related to the Beldray Lease Guarantee, as discussed above." from here Are these companies creating a liability by expensing the amount of the accrual on the income statement? Here is my inclination to what is happening: Amount of the probable loss = 240,000 Expenses 240,000 Dr. Accrued Expenses 240,000 Cr. When the probable loss is actually realized: Accrued Expenses 240,000 Dr. Cash 240,000 Cr. Can someone confirm if this is actually true, or if I am wrong?

Sponsored links