Question

Which of the following best exemplifies a contingency that is reported in the notes to the financial statements?

a. Loss from a lawsuit settled out of court prior to the end of the fiscal year.
b. Warranty claims on future sales.
c. Estimated loss from an ongoing lawsuit.
d. Losses from potential future lawsuits.

Answer 1

The correct answer is letter "C": Estimated loss from an ongoing lawsuit.

Step-by-step explanation:

A contingent liability is an amount that will need to be charged in the future but there are still outstanding problems that only make it a possibility. Litigation and the threat of litigation are the most common contingent liabilities, but this category also includes product warranties. If they are probable and the sum can be calculated, contingent liabilities must be reported on the company's Balance Sheet.