Unified Airlines is being sued by Northeast Airlines for $5,000,000.At the end of the year,Unified feels it is reasonably possible that it will pay $5,000,000 at some point in the following year.What should Unified and Northeast record at the end of the year concerning the lawsuit?
A)Unified does not record any contingent loss;Northeast records $5,000,000 contingent gain.
B)Neither company records a contingent loss or gain.
C)Unified records $5,000,000 contingent loss;Northeast records $5,000,000 contingent gain.

Question

Quizplus · Accepted Answer

According to accounting principles, a contingent loss should be recorded if it is probable and the amount can be reasonably estimated. Since Unified Airlines considers it only "reasonably possible," not probable, they should not record a contingent loss. Northeast Airlines cannot record a contingent gain as accounting standards prohibit recognizing contingent gains until they are realized.

Unified Airlines Is Being Sued by Northeast Airlines for $5,000,000