Question

Assume Amazon is involved in a major lawsuit and the probable damages are estimated to be $2,000,000. A. Describe the effects damage estimates would have on the financial statements of a corporation and a partnership. B. How do disclosure requirements differ from a corporation to a partnership and what information is required? C. Are the shareholders at risk for any personal liability with the company set up as a corporation? Defend your response. D. If your company was set up as a partnership, would the partners be at risk for personal liability? Defend your response.

Answer 1

A. If Amazon was involved in a major lawsuit, any potential losses which could arise would be considered as contingent liability. Contingent liabilities are recoreded in the books of accounts only if the contingency is probable and the amount of the liability can be estimated. Since, here the damages are probable and amount can be estimated, potential loss would be recorded in the income statement. it meets all the requirements, the potential loss would be recorded in the balance sheet and income statement. A contingent liability that is both probable and the amount can be estimated is recorded as 1) an expense or loss on the income statement, and 2) a liability on the balance sheet. As a result, a contingent liability is also referred to as a loss contingency

B. As per GAAP, contingent liabilities can be broken down into three categories based on the likelihood of those liabilities occurrance. For probable contingent liabilities, the company must disclose the estimated amount of the potential loss and also describe the contingency in the footnotes of its financial statements. A possible contingency must only be disclosed in the footnotes to accounts. Last, GAAP qualifies other contingent liabilities as "remote." The likelihood of these contingent liabilities actually triggering a cost is very low, and therefore accountants are not required to report them in the financial statements.

C. Shareholder of any limited liability company are not liable for any company's debts because in limilted liability company, company is a different legal entity from shareholders. For a company other than the limited liability company, shareholders are liable upto the debts promised by them. However, they will be liable if company cannot pay.

D. Partners are personally liable for the business obligations of the partnership except limited liability partnership. However, the limited liability partnership (LLP) is a similar business structure but it has no general partners. All of the owners of an LLP have limited personal liability for business debts are not unlimited.