Jim's Jeans is being sued by a former employee for $100,000. The employee is claiming age discrimination. She is twenty-four and was terminated when Jim decided that he wanted all employees to be over the age of sixty-five. Jim's attorney has told him that the employee has a strong case and will probably win. How does this impact Jim's accounting records?

Question

Quizplus · Accepted Answer

The lawsuit is a contingent liability of $100,000 and appears on the income statement as an expense.
Key Takeaway: A contingent liability is a loss that is both probable and has an amount that can be estimated. A nuisance suit for $1,000,000 would not meet the criteria. The contingent liability is recorded as an expense, thus it would appear on the income statement. It would also appear as a liability on the balance sheet.

Jim's Jeans Is Being Sued by a Former Employee for $100,000