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3 October, 20:24

Ogden Motors, Inc. is involved in a lawsuit. It is reasonably possible that the jury will find in favor of the plaintiff and Ogden will owe ten million dollars. What is the appropriate reporting of this lawsuit and what is the effect in the balance sheet?

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  1. 3 October, 20:32
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    No effect on the balance sheet

    Explanation:

    The treatment of contingent liabilities applies.

    Contingent liability is a potential liability that might arise as a result of the outcome of an uncertain future event.

    The rule guiding this is that it can only be recorded in the book of account if it is probable that the future event will occur and the value can reasonably estimated.

    It the outcome is not probable but reasonable as in the case of Ogden, it can only be disclosed in the note accompanying the financial statement and this is of no effect on the balance sheet.
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