Question

Brief Respite, Inc., sold underwear made from a fabric that gave many of its customers a serious rash. The customers are suing the company in a class action suit and Brief Respites attorneys think it is probable that the case will cost the company $2 million, although the verdict is not yet in. The company should ___________

Answer 1

Brief Respite, Inc., facing a probable $2 million loss from a lawsuit, should accrue a liability to reflect this in their financial statements, in accordance with accounting principles.

Step-by-step explanation:

Brief Respite, Inc. should accrue a liability for the lawsuit in their financial statements. This is because the attorneys believe it is probable that the company will incur a loss, and the amount can be reasonably estimated at $2 million. Accounting standards require that losses that are both probable and estimable must be recorded on the company's financial statements. Failing to account for this might misrepresent the company's financial position and could lead to legal ramifications under the securities laws.