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 probable 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

If it is only reasonably probable that Susann Inc. will lose the court case, the lawsuit is considered a contingent liability. According to accounting principles, contingent liabilities that are not probable or cannot be reasonably estimated do not need to be recorded in the financial statements, thus not affecting the debt/equity ratio.

An Employee of Susann Inc