Contingent liabilities present certain problems and opportunities for companies. You have been asked to help prepare the companys annual report and a lawsuit has been brought against the company for $50 million. Your company counsel has indicated that the claim of liability may be questionable; however, if your company is determined to be liable, the amount sued for may or may not be reasonable. The question is then, what information should you include in your annual report and why?

Ans : The information to be disclosed in the Annual Report should be by way of a note stating that : Contingent Liabilities include lawsuits against the Company for $ 50 million, the claim of which is questionable, and if the Company is liable to pay, may have to be cleared off after contesting the amount". This is because the lawsuit by itself is an amount which is either payable or not payable, depending on the final outcome of the case. And further, the value of the liability can be contested in a higher court, since it may or may not be reasonable.

According to this answer, should a journal entry be done to include the liability on the balance sheet or should the company only include a note in the financial statements?