Maxwell Corporation was involved in a lawsuit with the EPA alleging inadequate air pollution control facilities at its Granger plant site during 2008. At December 31, 2011, it appeared probable that the EPA would settle for approximately $150,000. This event should be recognized in 2011 as a(n)
A) extraordinary loss.
B) disclosure of a contingency loss only in a note.
C) should not be disclosed or recognized..
D) loss on the lawsuit (operating expense).

Question

Quizplus · Accepted Answer

The event should be recognized as a loss on the lawsuit (operating expense) since it is probable that the settlement will occur and the amount can be reasonably estimated. It is not an extraordinary item as it is not an unusual or infrequent event. It should also not just be disclosed in a note since it meets the criteria for recognition as a liability in the financial statements.

Maxwell Corporation Was Involved in a Lawsuit with the EPA