Question

Smart Touch Learning has a lawsuit pending from a customer claiming damages of​ $10,000. The attorney for Smart Touch Learning advises that the likelihood of the customer winning the lawsuit is about a​ 50% chance. GAAP requires at a minimum that this contingent liability be

Answer 1

GAAP requires that Smart Touch Learning record and disclose the $10,000 claim from the pending lawsuit as a contingent liability.

Step-by-step explanation:

According to GAAP (Generally Accepted Accounting Principles), a contingent liability such as a pending lawsuit should be recorded and disclosed if it is probable that a loss will occur and the amount can be reasonably estimated. In this case, since the attorney for Smart Touch Learning states that there is a 50% chance of the customer winning the lawsuit, it is considered probable. Therefore, GAAP requires that Smart Touch Learning record and disclose this contingent liabilty, which is the $10,000 claim.