A restaurant is being sued because a customer claims to have found a bug in her chili.The company's lawyers believe there is only a remote possibility that the lawsuit will result in an actual liability.Which of the following actions should be taken by the company's management?
A) The situation should be described in a note to the financial statements.
B) The possible liability should not be shown in the financial statements.
C) The liability should be estimated and accrued as an expense.
D) An expense must be matched to the period in which the incident occurred.

Question

Quizplus · Accepted Answer

The possible liability should not be shown in the financial statements since the company's lawyers believe it to be a remote possibility. Accruing expenses for a possible liability that is unlikely to occur would not be appropriate. In addition, the situation does not meet the criteria for disclosure in the financial statements.

A Restaurant Is Being Sued Because a Customer Claims to Have