Fisher Company has been named as the defendant in a class action lawsuit. In addition, the company is located in a region that normally has an active hurricane season. Indicate whether each of the following statements is true or false.________ a) If the likelihood of a future obligation is probable and can be reasonably estimated, a liability should be recognized on the balance sheet.
________ b) If the outcome is probable, but cannot be reasonably estimated, the contingency should be disclosed in the notes to the financial statements.
________ c) If the outcome is reasonably possible but not likely, the contingency should be disclosed in the notes to the financial statements.
________ d) Every lawsuit, regardless how frivolous, should be disclosed in the notes to the financial statements.
________ e) Since it is located in a region for which an active hurricane season has been predicted, the company must disclose the contingent liability, which is the potential for catastrophic loss, in the notes to their financial statements.
What will be an ideal response?
a) T b) T c) T d) F e) F
a) This is true. If the likelihood of a future obligation arising is probable (likely) and its amount can be reasonably estimated, a liability is recognized in the financial statements.
b) This is true. If the likelihood of a future obligation is probable but cannot be reasonably estimated, no liability is reported on the balance sheet. The potential liability is, however, disclosed in the notes to the financial statements.
c) This is true. If the likelihood of a future obligation arising is reasonably possible but not likely, no liability is reported on the balance sheet. The potential liability is, however, disclosed in the notes to the financial statements.
d) This is false. If the likelihood of a future obligation arising is remote, which might be the case with a frivolous lawsuit, no liability need be recognized in the financial statements or disclosed in the notes to the statements.
e) This is false. All businesses face uncertainties such as competition and damage from floods or storms. Such uncertainties are not contingent liabilities, however, because they do not arise from past events.
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