Question

Swell Company has a lawsuit pending from a customer claiming damages of $100,000. Swell's attorney advises that the likelihood the customer will win is remote. GAAP requires at a minimum that this contingent liability be

A. disclosed in the footnotes.
B. disclosed in the footnotes, with ranges of potential loss.
C. recorded as a journal entry, as well as disclosed in the footnotes.
D. No disclosure is required

Answer 1

Under GAAP, Swell Company should disclose the contingent liability of a lawsuit with a remote likelihood of winning in the footnotes of the financial statements, without the need for a journal entry or disclosure of potential loss ranges.

Step-by-step explanation:

The question pertains to how Swell Company should account for a contingent liability under Generally Accepted Accounting Principles (GAAP). When a company faces a lawsuit with a remote likelihood of loss, GAAP requires that the contingent liability be disclosed in the footnotes of the financial statements.

This disclosure provides information about the nature of the contingency, the possible financial impact if the loss were to occur, and an explanation of why the loss is considered remote. No journal entry is recorded if the potential loss is deemed remote, and no ranges of potential loss need to be disclosed in this case.