An employee of Susann Inc. failed two drug tests. The employee has sued and Susann Inc.'s. lawyers appropriately believe that, at best, it is only reasonably possible that Susann Inc. will lose the court case. The proper accounting treatment of the lawsuit will
A)increase earnings per share.
B)increase the debt/asset ratio.
C)decrease the current ratio.
D)not affect the debt/equity ratio.

Question

Quizplus · Accepted Answer

When a loss from a lawsuit is considered reasonably possible but not probable, generally accepted accounting principles (GAAP) require disclosure in the notes to the financial statements rather than an accrual of the loss. Therefore, there would be no immediate impact on the balance sheet or income statement, and thus, the debt/equity ratio would not be affected.

An Employee of Susann Inc