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 as which of the following?

Question

Quizplus · Accepted Answer

According to accounting principles, when a loss is probable and the amount can be reasonably estimated, the entity should record the loss and a related liability in the financial statements. In this case, since Alamo's lawyers believe it is probable that the jury will find in favor of the plaintiff and the amount is known ($2 million), Alamo should record this as a loss.