Quiz 4 - Question #5

A customer has filed a lawsuit against your company. Your attorneys have reviewed the facts of the case. They believe that it is reasonably possible (but not probable or certain) that the judge will award the plaintiff (your customer) up to $100,000. Which of the following is the proper accounting treatment for your company? Choose the best option

Record a liability by debiting a liability account and crediting a loss account.

Record a liability by debited a loss account and crediting a liability account.

Record a liability by debiting a liability account and crediting retained earnings.

Disclose the basic facts about the lawsuit in a financial statement footnote but do not record a liability.

Record a liability by debiting retained earnings and crediting a liability account.

Neither disclose the basic facts about the lawsuit nor record a liability