Ditka Engineering Co. has signed a third-party loan guarantee for Liberty Company. The loan is from the National Bank of Illinois for $500,000. Liberty has recently filed for bankruptcy, and it is estimated by the company?s auditors that creditors can expect to receive no more than 40% of their claims from Liberty. Ditka?s treasurer believes that because of the high uncertainty of final settlement, a liability should be recorded for the entire $500,000. The chief accountant, on the other hand, believes the 40% collection figure is reasonable and proposes that a $300,000 liability be recorded. Ditka?s president does not think a reasonable estimate can be made at this time and proposes that nothing be accrued for the contingent liability but that a note be added to the financial statements explaining the situation. As an independent outside auditor, what position would you take? Why?
This question was answered on: Jul 11, 2017
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