Your boss has just asked you to write a short note to one of his clients that had expressed some concerns about the difference between liabilities that are of an unknown amount versus contingent liabilities. The client is in the midst of a lawsuit with a governmental agency that its attorney thinks has about a 5050 chance of winning. However, if the company loses, it could cost a substantial amount of money. The client is wondering if it needs to account for the lawsuit, and if so, how?

Requirement 1. Write a note to the client explaining the difference between a liability of an unknown amount and a contingent liability. Also, make a suggestion as to how this particular situation might need to be accounted for.

Excerpt From:

Kemp, Robert, Jeffrey Waybright. Financial Accounting, 4th Edition. Pearson, 2017. [p. 452].