Question

Burger Barn has been named as a plaintiff in a $5 million lawsuit filed by a customer over the addictive nature of the company's French fries. Burger Barn's attorneys have advised them that the likelihood of a future obligation from the suit is remote. As a result of the lawsuit, Burger Barn should:
a. Ignore the lawsuit in its financial statements
b. Disclose the lawsuit in the notes to the financial statements
c. Recognize a $5 million liability on its balance sheet for the contingency
d. Settle with the customer immediately for $5 million to avoid harmful publicity.

Answer 1

Answer:

a. Ignore the lawsuit in its financial statements .

Explanation:

When reporting under financial statements then there is certain requirement of any transaction to be recorded in financial statements.

In the given instance also, the basic requirement is certainty. When a transaction as an expense or liability is certain then it shall be recorded.

Here, the chance of law suit being in favor of customer is remote according to the lawyer. Since the chances are law, and the lawyer is experienced and thus, his valuation will be a fair basis for this event. It shall not be recorded in the books.