Special Liabilities Lanway’s most recent financial statements have a note that states “the company is involved in legal proceedings resulting from a lawsuit filed against the company for failure to provide adequate financial counseling for employees who have retired under the new company retirement program. The plaintiffs are seeking a judgment of $800,000 against the company. The management of Lanway feels the suit is without merit and will eventually be dismissed.”

a. Why is a situation such as this considered to be a contingent liability?

b. Does the fact that Lanway reported this in its notes rather than as a liability in its balance sheet mean the company will not be held liable? Explain.

c. What will be the financial statement effects if, at the time the suit is brought to trial, the management of Lanway concludes the company is likely to be found liable for damages of $350,000?