German Auto Parts is a defendant in a multi-million dollar lawsuit that was filed in a...
German Auto Parts is a defendant in a multi-million dollar lawsuit that was filed in a prior year. The lawsuit was not previously disclosed in the financial statements or accompanying footnotes, as the company has vigorously defended its position and its attorneys initially indicated that the claim was not valid. During the current year, however, the facts and circumstances have changed such that the likelihood of a loss approximating $5 million is now considered reasonably possible. How should the company recognize this lawsuit in its current year financial statements?
A. Do nothing, since it was not recognized in previous periods.
B. Do nothing, since it was not recognized in previous periods.
C. Disclose the matter in the footnotes accompanying the financial statements.
D. Record a contingent liability in the amount of $5 million
Homework Answers
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| German Auto Parts is a defendant in a multi-million dollar lawsuit that was filed in a prior year. The lawsuit was not previously disclosed in the financial statements or accompanying footnotes, as the company has vigorously defended its position and its attorneys initially indicated that the claim was not valid. During the current year, however, the facts and circumstances have changed such that the likelihood of a loss approximating $5 million is now considered reasonably possible. How should the company recognize this lawsuit in its current year financial statements? |
| As the liability is reasonably possible so contingent liability has to be created and proper notes should be provided. |
| So Answer is option D. |
| D. Record a contingent liability in the amount of $5 million |
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