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Should the company record a loss reserve at year end

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Question - Contingent Liabilities Facts: A company is sued prior to the financial statement date (i.e. year-end). Before the financial statements are issued, the suit is settled for $825,000, a material loss to the company.

Before year-end, a company is assessed $250,000 in additional taxes as a result of an IRS audit. The company's tax attorney believes that a settlement with the IRS can be reached for $120,000. Settlement has not been reached before the financial statements are issued.

Required - For both cases discussed above, answer two questions:

1. Should the company record a loss reserve at year end, and if so, for how much?

2. Should the company disclose this matter in the footnotes to the company's financial statements at year end?

Reference no: EM132854243

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