Answer :
The most appropriate financial statement presentation for this loss contingency would be to record $500,000 as a loss contingency. Hence option (c) is the answer.
What is a loss contingency?
A loss contingency is an expense that is added to account for an event that is thought to be likely to occur in the future, such as a lawsuit's unfavorable conclusion. An early notice of an upcoming payment connected to a probable obligation is provided to readers of an organization's financial statements by a loss contingency.
Potential liabilities called contingencies could arise from a previous occurrence. Still unknown is the possibility of a loss or the precise dollar amount of the loss. When loss contingencies are likely to occur and can be reasonably estimated, they are acknowledged.
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The complete question is:
Warren Company is being sued in a wrongful discharge suit for $500,000. The company attorney has advised Warren that the probability of the plaintiff prevailing and receiving the full amount is about 80%. The attorney also indicated that the case would likely be tied up in the courts for 2 to 3 years. The most appropriate financial statement presentation for this loss contingency would be to
a. Disclose the loss contingency in the footnotes.
b. Record $400,000 as a loss contingency.
c. Record $500,000 as a loss contingency.
d. Not record or footnote the loss contingency.