Brief Respite,Inc.sold underwear made from a fabric that gave many of its customers a serious rash.The customers are suing the company in a class action suit.Although the verdict is not yet in,Brief Respite's attorneys think it is probable that the case will cost the company $2 million.The company should:
A)not include this information in its annual report.
B)record a liability and a gain for $2 million.
C)only explain the situation in the notes to the financial statements.
D)record a liability and a loss for $2 million.

Question

Quizplus · Accepted Answer

Since the contingent liability can be reasonably estimated and is considered probable,the company is required to record a liability and a loss for $2 million.