Q14RQ - Horngren'S Financial And Managerial Accounting

Question

Curtis Company is facing a potential lawsuit. Curtis’s lawyers think that it is reasonably possible that it will lose the lawsuit. How should Curtis report this lawsuit?

Step-by-Step Solution

Answer

Reasonable possible contingent liability is recorded in the notes to the financial statement. 

Step 1: Contingent liability

Contingent liability is a potential liability that is estimated but not incurred until the happening of some future event. It can be remote, reasonably possible, or probable. 

The accounting of contingent liability depends upon the type of contingency.

Step 2: Accounting for contingency in the given case

Reasonable possible contingency has a greater chance of happening but is not likely to happen. As the lawsuit is reasonably possible in the given case it would be reported in notes to the financial statement