Ultimate Company is a defendant in a lawsuit alleging damages of $3 billion. The litigation is expected to continue for several years, and no reasonable estimate can be made at this time of Ultimate Company's ultimate financial responsibility. This situation is an example of:

Question

Quizplus · Accepted Answer

This situation is an example of a contingent liability, which means that there is a possible obligation or liability that arises from past events, but it is not certain whether it will result in an actual loss or obligation. As such, it should be disclosed in the notes to Ultimate Company's financial statements. Off-balance-sheet financing refers to financing activities that do not appear on the balance sheet, while a provision is an amount set aside to cover an anticipated liability or expense. Neither of these choices is applicable to the situation described. The loss in purchasing power caused by inflation is not relevant to this scenario.

Ultimate Company Is a Defendant in a Lawsuit Alleging Damages