In May 2011, the Marlins Company Became Involved in Litigation

question 5

Multiple Choice

In May 2011, the Marlins Company became involved in litigation. As a result of this litigation, it is probable that Marlins will have to pay $700,000. In July 2011, a competitor commenced a suit against Marlins alleging violation of antitrust laws seeking damages of $1,100,000. Marlins denies the allegations, and the likelihood of Marlins paying any damages is remote. In September 2011, Braves County brought action against Marlins for $900,000 for polluting Lake Tomahawk. It is reasonably possible that Braves County will be successful, but the amount of damages Marlins will have to pay is not reasonably determinable. What amount, if any, should be accrued by a charge to income in 2011?

• A) $2,700,000
• B) $1,600,000
• C) $700,000
• D) $0

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Definitions:

Total Costs

Total costs are the sum of all expenses incurred in the production of goods or services, including both fixed and variable costs.

Total Variable Costs

The summation of all costs that vary with the level of output, such as raw materials and labor costs, differing from fixed costs.

Total Fixed Costs

The sum of all costs required to produce any good or service, that do not change with the volume of production.

Average Variable Costs

The total variable expenses of producing an item, divided by the quantity of items produced, accounting for costs that change with the production volume.