Question

Under what condition should a pending lawsuit be recognized as a liability on a company's balance sheet?(a) The outcome is reasonably possible.(b) The outcome is probable.(c) The amount can be reasonably estimated.(d) Both (b) and (c).

Answer 1

Answer:

(d) Both (b) and (c).

Explanation:

A liability can be defined as a future financial sacrifice or obligation that are economically beneficial, which are being made by a company to another business firms with respect to past transactions or events. This financial sacrifice are generally being reported on a company's balance sheet.

Mathematically, liability is given by the formula;

$Liability = Assets - Equity$

Hence, the condition under which a pending lawsuit should be recognized as a liability on a company's balance sheet is if;

1. The outcome is probable: this simply means when the outcome of a pending lawsuit is most likely to be true, the financial litigation is considered to be a liability.

2. The amount can be reasonably estimated: the amount being owed or in question can be obtained by estimation.