A corporation has been sued for product failures allegedly resulting in injuries to the individuals bringing the lawsuit.The company's lawyers believe it is more than remote,but less than probable,that the lawsuit will result in an actual liability.Which of the following actions should be taken by the company's management?
A)The liability should be estimated and recorded as an expense.
B)The situation should be described in a note to the financial statements.
C)The possible liability should be ignored.
D)Management should consider resigning.

Question

Quizplus · Accepted Answer

The situation should be described in a note to the financial statements. This is because the chance of liability is more than remote but less than probable, indicating that it is a possible contingency or risk. As a result, it is necessary to disclose the possible liability in the financial statements so that investors can make informed decisions when evaluating the company's financial position. Options A and C are incorrect because estimating and recording an expense or ignoring the possible liability would be inappropriate actions. Option D is irrelevant and inappropriate.

A Corporation Has Been Sued for Product Failures Allegedly Resulting