Alamo Autoworks, Inc. is involved in a lawsuit. Their lawyers state that it is probable that the jury will find in favour of the plaintiff and Alamo will owe two million dollars. Even though the lawsuit is not yet settled, Alamo should record a liability in the statement of financial position and which of the following?

Question

Quizplus · Accepted Answer

Alamo should record a liability for the probable amount that they will owe in the lawsuit. This liability should be recorded as a loss in the statement of financial position. Option B, prepaid expenses, refers to payments made in advance for goods or services that will be received in the future. Option C, deferred revenue, refers to money received in advance for products or services that have not yet been delivered. Option D, a contra-asset, is used to reduce the amount of a related asset and would not be appropriate in this case.