Amplify, Inc. was sued by Sound City for $50,000. Sound City feels very confident that it will win the case and will be awarded the full amount. Amplify, Inc. feels it is probable that it will lose the case and pay Sound City the full amount. Which of the following is correct?
A) Amplify, Inc. would record a loss and contingent liability for $50,000.
B) Sound City would record a gain and lawsuit receivable for $50,000.
C) Sound City would record nothing.
D) Amplify, Inc. would record a loss and contingent liability for $50,000 Sound City would record nothing.
Answer: D
Ogden Motors, Inc. is involved in a lawsuit. It is reasonably possible that the jury will find in favor of the plaintiff and Ogden will owe ten million dollars. What is the appropriate reporting of this lawsuit and what is the effect in the balance sheet?
A) Record decrease stockholders' equity and increase liabilities.
B) Record increase stockholders' equity and decrease liabilities.
C) Disclose no effect in the balance sheet.
D) Disclose decrease stockholders' equity and decrease liabilities.
Answer: C
A company has two active lawsuits at the end of the year. In Lawsuit 1, the company feels it is probable that it will win $10,000. In Lawsuit 2, the company feels that it is probable that it will lose $6,000. At the end of the year, the company should report a:
A) Net gain for $4,000.
B) Loss for $6,000.
C) Net Loss for $4,000.
D) Gain for $10,000.
Answer: B
