Question

Warren Advertising becomes aware of a lawsuit after the end of the fiscal year, but prior to the issuance of financial statements. A loss should be accrued and a liability should be reported if the amount can be reasonably estimated and:

A)The cause for action occurred prior to the end of the fiscal year.
B)The damages would be payable within a year.
C)Both a. and b.
D)The contingency should not be accrued.

Answer 1

In accounting, a loss from a lawsuit should be accrued and a liability reported if the amount can be reasonably estimated and the cause for action occurred before the end of the fiscal year.

Step-by-step explanation:

In accounting, when a company becomes aware of a potential loss from a lawsuit after the fiscal year-end but before the financial statements are issued, the appropriate course of action is to record an accrual for the loss and report a liability. According to Generally Accepted Accounting Principles (GAAP), this should be done if the amount can be reasonably estimated and the cause for action occurred prior to the end of the fiscal year. Therefore, the correct answer to when a loss should be accrued and a liability reported is A) The cause for action occurred prior to the end of the fiscal year. The payment terms, such as whether the damages would be payable within a year, do not change the necessity to accrue as this is determined by the event's occurrence date relative to the financial reporting period.

Answer 2

The answer is: A) The cause for action occurred prior to the end of the fiscal year.

Step-by-step explanation:

Warren Advertising should always accrue its losses or liabilities according to the following basic accounting principles:

Accrual principle: Transactions must be recorded in the periods when they actually occur, not necessarily than in the periods when there are cash flows associated with them.

Conservatism principle: Expenses and liabilities must be recorded as soon as possible, revenue and assets only when they occur.