Question

Analyzing Contingent and Other Liabilities:

Answer 1

Answer:

1. Situation is that a Stockholder has filed a lawsuit against C corporation.

Accounting treatment: Neither record nor disclose any liability.

Since the liability is not at all possible, it should be neither recorded nor disclosed.

2. Situation: F signed a 60 days, 10% note when it purchased items from another company.

Account treatment: Record the liability on the balance sheet.

Real liability that is both certain and the liability amount can also be reasonably estimated.  It should be recorded on the balance sheet.

3. The EPA notifies S co that a state where it has a plant is filing a lawsuit.

Account treatment: Disclose the liability in a financial statement footnote.

The liability is probable but not certain and liability amount can also be reasonably estimated.  It should be disclosed in financial statement footnote.

4. Situation: Company manufactured and sold products to a retailer that later sold product to consumer.

Account treatment: Record the liability on the balance sheet.

Real liability that is both certain and the liability amount can also be reasonably estimated.  It should be recorded on the balance sheet.