Question

Safe Scooters, Inc. sold scooters which they knew had faulty brakes. Consumers found out, and Safe Scooters is now facing a lawsuit over the unsafe scooters; however, no dollar amounts have been assigned to the case. This lawsuit would be considered a(n):

A. deferred expense.

B. estimated liability.

C. known liability.

D. contingent liability.

Answer 1

In the case of Safe Scooters, Inc., the lawsuit due to the faulty brakes represents a contingent liability because the financial outcome or requirement to pay is dependent on the result of the lawsuit, and the exact amount is not yet determined.

Step-by-step explanation:

The situation described involves Safe Scooters, Inc., which sold scooters while being aware of faulty brakes. Given that the lawsuit has occurred but no specific monetary amount has been determined, this situation would be classified as a contingent liability. A contingent liability is a potential financial obligation that may arise depending on the outcome of a future event, such as a lawsuit. In this case, because Safe Scooters is facing a lawsuit due to known issues with their product, they have a potential liability that is contingent on the results of the lawsuit. It is not considered a deferred expense or a known liability because the exact amount has not been determined. Nor is it an estimated liability, which typically refers to liabilities with an amount or range that can be reasonably estimated, but which may still be subject to change.