Question

A customer has sued Smith & Sons for an injury sustained while shopping at a

company outlet. The company’s management determined that it is possible that

the customer will win the lawsuit and estimated that the possible lawsuit award

might be as high as $1,000,000. Smith & Sons should:

Select one:

Record a liability in the company’s financial statements.

Record a liability and a loss in the company’s financial statements.

Do not record a liability in the financial statements but disclose the information
in a note to the company’s financial statements.

Neither record a liability in the company’s financial statements nor disclose
the information in a note to its financial statements.

Answer 1

Do not record a liability in the financial statements but disclose the information in a note to the company’s financial statements.

As the outflow of resources is possible and the amount can be reasonably estimated, it should be disclosed in a note to the company’s financial statements.

Option C is correct