Contingent Liabilities
Response to the following problem:
Rayn Company is involved in the following legal matters:
a. A customer is suing Rayn for allegedly selling a faulty and dangerous product. Rayn's attorneys believe that there is a 40% chance of Rayn's losing the suit.
b. A federal agency has accused Rayn of violating numerous employee safety laws. The company faces significant fines if found guilty. Rayn's attorneys feel that the company has complied with all applicable laws, and they therefore place the probability of incurring the fines at less than 10%.
c. Rayn has been named in a gender discrimination lawsuit. In the past, Rayn has systematically promoted its male employees at a faster rate than it has promoted its female employees. Rayn's attorneys judge the probability that Rayn will lose this lawsuit at more than 90%.
For each item, determine the appropriate accounting treatment.