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CPA Accountant Review Questions

Category - Accounting

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Jim’s Jeans is being sued by a former employee for $100,000. The employee is claiming age discrimination. She is twenty-four and was terminated when Jim decided that he wanted all employees to be over the age of sixty-five. Jim’s attorney has told him that the employee has a strong case and will probably win. How does this impact Jim’s accounting records?
  1. A note is made on the Balance Sheet regarding the lawsuit.
  2. There is no impact on the financial statement unless the employee wins the suit.
  3. A loss of $100,000 appears in the owner’s equity section on the balance sheet.
  4. An entry will appear on the statement of cash flows.
  5. A contingent liability of $100,000 appears on the income statement as an expense.
Explanation
Answer - E - The lawsuit is a contingent liability of $100,000 and appears on the income statement as an expense.

Key Takeaway: A contingent liability is a loss that is both probable and has an amount that can be estimated. A nuisance suit for $1,000,000 would not meet the criteria. The contingent liability is recorded as an expense, thus it would appear on the income statement. It would also appear as a liability on the balance sheet.
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