An entity is currently under investigation for providing defective products to their customers.If found guilty,the entity may be required to compensate their customers for approximately $500 000.The court case is still pending and the outcome will not be known until later in the next financial year.For the current financial year,the amount of $500,000 will be:
A) recognised in the balance sheet as an asset.
B) recognised in the balance sheet as a liability.
C) recognised in the balance sheet as a contingent liability.
D) disclosed in the notes to the financial statements as a contingent liability.

Question

Quizplus · Accepted Answer

Given the uncertainty of the outcome of the court case and the fact that the resolution will not be known until the next financial year, the $500,000 should be disclosed in the notes to the financial statements as a contingent liability, rather than being recognized on the balance sheet. This approach is consistent with accounting principles for handling uncertain liabilities that depend on future events.

An Entity Is Currently Under Investigation for Providing Defective Products