If a loss contingency related to a lawsuit against a firm is deemed to have a reasonable probability of requiring ultimate payment, then the proper accounting treatment of the loss contingency will
A)require note disclosure.
B)decrease the debt/asset ratio.
C)increase the accounts payable/sales ratio.
D)decrease the debt/equity ratio.

Question

Quizplus · Accepted Answer

If a loss contingency related to a lawsuit against a firm is deemed to have a reasonable probability of requiring ultimate payment, then the proper accounting treatment is to recognize an estimated loss and disclose it in the notes to the financial statements. Therefore, the correct choice is A, which states that note disclosure is required. Choices B, C, and D are not relevant to the accounting treatment of a loss contingency.

If a Loss Contingency Related to a Lawsuit Against a Firm