Assume that Krenzel Company is subject to a class action lawsuit from its customers resulting from the failure of one of its projects.The suit was filed on November 10,2012 and properly disclosed in Krenzel's December 31,2012 financial statements.How would a settlement of this lawsuit on January 17,2013 be properly reflected in Krenzel's financial statements?
A) The financial statements would not reflect the settlement of the lawsuit because it occurred after the date of the financial statements.
B) Krenzel would prepare pro forma financial statements to reveal the effects of this settlement.
C) Krenzel would adjust its disclosure of the lawsuit to reflect the effects of this settlement.
D) Krenzel would provide a separate disclosure to persons known to be relying on its financial statements to describe the effects of this settlement.

Question

Quizplus · Accepted Answer

Krenzel would adjust the disclosure of the lawsuit to reflect the effects of the settlement. This is because the financial statements already disclosed the lawsuit as a contingent liability, which means that the amount was estimated and included in the company's financial statements. The settlement amount would need to be reflected in the disclosure to provide accuracy to the information previously given. The other options are not correct because the financial statements need to be adjusted to reflect the effects of the settlement, rather than leaving the information out or creating pro forma statements. A separate disclosure may be needed for users of the financial statements, but the adjustment to the original disclosure is necessary for accuracy.

Assume That Krenzel Company Is Subject to a Class Action