Vaughn Manufacturing 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. Vaughn's lawyer states that it is probable that Vaughn will lose the suit and be found liable for a judgment costing Vaughn anywhere from $1,840,000 to $9,030,000. However, the lawyer states that the most probable cost is $5,400,000.
As a result of the above facts, Vaughn should accrue .

A) a loss contingency of $1,840,000 and disclose an additional contingency of up to $7,190,000.
B) a loss contingency of $5,400,000 and disclose an additional contingency of up to $3,630,000.
C) a loss contingency of $5,400,000 but not disclose any additional contingency.
D) no loss contingency but disclose a contingency of $1,840,000 to $9,030,000.

B) a loss contingency of $5,400,000 and disclose an additional contingency of up to .

Explanation:

A contingency is a situation for which an uncertain outcome arises, and which should be resolved in the future, possibly creating a loss. There is therefore a need to account for a contingency to recognize only those losses that are probable and for which a loss amount can be reasonably estimated.

In our case Vaughn Manufacturing stands to lose at most $9,030,000 from the law suit. Based on past experience and previous similar lawsuits handled by its lawyer has predicted a probable cost of $5,400,000. This probable cost should be recorded as a loss contingency for the portion of the situation that is probable while the remainder ( $3,630,000)  for the amount of the loss that can not be reasonably estimated.

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