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 and which of the following?

Question

Quizplus · Accepted Answer

Alamo Autoworks, Inc. should record a liability for the estimated loss from the lawsuit in the statement of financial position. The estimated loss is a probable and measurable event, so it meets the criteria for recording a liability. The other options (prepaid expense, deferred revenue, contra-asset) do not apply in this situation.