Question

Question 20 One of Tonic Corp's employees invented a revolutionary coffee lid that cools coffee as you drink it in order to prevent bur Iwo children ordered coffee and burned their mouths after failing to properly secure the lids. The children's parents suer Tonic Corp's lawyers believe that it is highly probable that judgment will be rendered against Tonic Corp and it is likely a payment in excess of $2 million will be incurred. The proper accounting treatment of the lawsuit will decrease total liabilities. O increase total liabilities. increase the current ratio. O require accountants to wait until the suit is settled to account for the event. Question 21

Answer 1

Answer:

Correct answer is:

increase total liabilities

Explanation:

As given:

1. It is highly probable that judgement will be rendered against Tonic Corp

2. The liability can be reasonably estimated it would be in excess of $2 million.

As such contingent liability has to be recorded. This will increase total liabilities.

Option B is correct and options A and D are incorrect.

Option C is incorrect as increase in liability would decrease current ratio