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:
A)Off-balance-sheet financing.
B)A loss contingency which should be disclosed in notes to Ultimate Company's financial statements.
C)An estimated liability which must appear in Ultimate Company's balance sheet.
D)A loss in purchasing power caused by inflation.

Question

Quizplus · Accepted Answer

The situation described is a loss contingency, as the outcome of the lawsuit is uncertain and cannot be reasonably estimated at this time. As such, it should be disclosed in the notes to Ultimate Company's financial statements in accordance with accounting standards. Off-balance-sheet financing, estimated liabilities, and loss in purchasing power caused by inflation are not relevant to this situation.

Ultimate Company Is a Defendant in a Lawsuit Alleging Damages