Question

Monterrey Inc. is aware of a potential claim that could be made against it. Monterrey believes it is not probable that the claim will be asserted, but that, if the claim is asserted, it is probable that it would incur a $5 million loss. Monterrey’s financial statements should:

Multiple Choice

• Disclose the potential for a judgment in the notes, but not indicate the amount, since the claim has not been asserted.

• Disclose in the notes that a $5 million claim could be asserted and, if asserted, is probable to produce a $5 million loss.

• Accrue a $5 million liability and explain it in a note to the financial statements.

• Do nothing relative to the contingency.

Answer 1