Which of the following is an example of a loss contingency that should be disclosed in a footnote to a company's financial statements?
A)The president of the company has threatened to resign if the board of directors does not vote to increase executive salaries.
B)A lawsuit has been brought against the company,but the company hopes to prevail in the suit and thereby avoid any liability.
C)The allowance for uncollectible accounts receivable is estimated at $200,000.
D)The company owns special-purpose machinery which,if sold,would probably bring a price less than its current book value.

Question

Quizplus · Accepted Answer

A loss contingency is a potential future event that may result in a loss to the company. If the probability of the event occurring and the amount of the potential loss can be reasonably estimated, then it should be disclosed in the financial statements. In option B, a lawsuit has been brought against the company, which could result in a loss, but the company hopes to prevail. This meets the criteria for a loss contingency that should be disclosed. The other options do not meet the criteria for a loss contingency because they either do not involve a potential loss or the probability and amount of the potential loss cannot be reasonably estimated.

Which of the Following Is an Example of a Loss