Ogden Motors,Inc.is involved in a lawsuit.It is reasonably possible that the jury will find in favor of the plaintiff and Ogden will owe ten million dollars.What is the appropriate reporting of this lawsuit and what is the effect on the balance sheet?

Question

Quizplus · Accepted Answer

When a lawsuit's outcome is considered "reasonably possible" but not probable, and the amount can be estimated, the appropriate accounting treatment is to disclose the lawsuit in the notes to the financial statements rather than recording it on the balance sheet. This means there is no immediate effect on the balance sheet until the outcome becomes more certain.