Question

In late 2018, NVIDIA Company was sued for patent infringement related to a new software product. At year-end, the company’s attorney advises that a loss is probable under this lawsuit, but it is not currently possible to reasonably estimate such amount.

a. What treatment would this contingent liability receive in the company’s December 31, 2018 financial statement?

b. Assume the same facts as above, but assume that this lawsuit was settled for $5 million after the end of the year, but before the financial statements were issued. How would your answer above change?

Answer 1

a) A contingent liability is a liability or a potential loss that may occur in the future depending on the outcome of a specific event.

If there is a strong case, the company would book that amount as contingent liability on its balance sheet.

When the probability of a contingent liability is low then is no journal or even a disclosure is required in the books of accounts.

Financial Statement Treatments
	Journalize	Note Disclosure
Probable and estimable	Yes	Yes
Probable and inestimable	No	Yes
Reasonably possible	No	Yes
Remote	No	No

b)In this case, Qualifying contingent liabilities are recorded as an expense on the income statement and a liability on the balance sheet.

Since it was a Contingent Liabilty andsettled before financial statements were issued, hence the it changes have to be made in the balance sheet resepectively.