Boston Trombley Company is a defendant in a lawsuit alleging damages of $3 billion.The litigation is anticipated to continue for several years, but no reasonable estimate can be made at this time regarding ultimate financial responsibility.This situation is an example of:

Question

Quizplus · Accepted Answer

This scenario is an example of a loss contingency where the outcome is uncertain and no reasonable estimate can be made. As per accounting standards, such contingencies should be disclosed in the notes to the financial statements, but no accrual is required in the financial statements. Therefore, option B is the correct answer. Option A is incorrect because no expense should be recorded in the income statement until the outcome of the lawsuit is certain. Option C is incorrect because no estimated liability can be recognized until the outcome of the lawsuit is known. Option D is also incorrect because disclosure is required in such situations.

Boston Trombley Company Is a Defendant in a Lawsuit Alleging