Answered: A distressed student is suing his…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

A distressed student is suing his college, claiming that his accounting instructor is a sorceress of evil trickery. The school's legal advisors cannot reasonably estimate the amount the school may have to pay in damages for the student's extreme pain and suffering.

The advisors do believe there is a high probability the college will lose the case and need to pay damages to the traumatized student. This represents a:

a.necessary part of taking any college-level

accounting class.

b. known liability that should be ignored.

c. contingent liability that should be journalized.

d. contingent liability that should be disclosed in the

financial statement notes.

Definition Definition Costs that a business is responsible for paying, should a particular event potentially occur in the future. Also called a potential liability, a contingent liability is generally recorded only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly. The Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Principles (IFRS) make it mandatory for the companies to record any contingent liability taking the principles of full disclosure, materiality, and prudence into consideration.

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