For each of the situations listed, indicate whether FASB rules would require the company to: accrue a liability; disclose a contingency, but not accrue a liability; both accrue a contingent liability and disclose it; neither accrue nor disclose it. Explain.

A. The company owns a factory in California. Since California sometimes has earthquakes, how should the company account for the possibility of future earthquake damage?

B. The company is being sued for labor law violations in previous years.

The company believes it is probable it will have to pay, and believes the best estimate of the loss is $8 million.

C. The company is being sued by a customer who says the company sent defective products. The company believes the products were actually OK, but anything can happen in a lawsuit. The company’s lawyers say it is reasonably possible the company could have to pay $1 million.

D. The company is being sued under the securities laws for misleading financial statements. The company’s lawyers say the chance of losing the case is remote.

E. One of the company’s factories exploded on December 30.

15 people were killed. No one has actually sued yet, but the company’s lawyers say that lawsuits are highly likely to come, and the company will probably have to pay damages of from $50 to $80 million. All numbers within that range are equally likely.

F. Same as point E above, but the attorneys say it is just too early to make any reliable estimate of the likely amount the company will have to pay.