Question

Ultimate Company is a defendant in a lawsuit alleging damages of $3 billion. The litigation is expected to continue for several years, and no reasonable estimate can be made at this time of Ultimate Company's ultimate financial responsibility. This situation is an example of:
A. Off-balance-sheet financing.
B. A loss contingency which should be disclosed in notes to Ultimate Company's financial statements.
C. An estimated liability which must appear in Ultimate Company's balance sheet.
D. A loss in purchasing power caused by inflation.

Answer 1

Answer: B. A loss contingency which should be disclosed in notes to Ultimate Company's financial statements

Explanation: Ultimate company with an allege lawsuit demage of $3billion and the litigation will continue for several years, this situation is an example of "a loss contingency which should be disclosed in notes to Ultimate Company's financial statements".

A loss contingency means charge to expense for a possible future event such as an outcome of a lawsuit . A loss contingency will give the reader of a financial statements of a firm, early warnings of an impending payments of obligation.

Answer 2

Answer:

Option B.

Explanation:

A loss contingency refers to a charge to expense for what is considered to be a probable future event, such as an adverse outcome of a lawsuit. A loss contingency usually gives the person who is reading an organization's financial statements an early warning of a payment which is impending, and which is related to a likely obligation.

In the scenario presented above, we can see that Ultimate Company is involved in a lawsuit and might be expected to pay $3 billion, this reflects the situation of a loss contingency which should be disclosed in notes to Ultimate Company's financial statements.