In the accounting records of a defendant, lawsuits:

multiple choice
a. should be recorded if payment for damages is probable and the amount can be reasonably estimated.
b. are known liabilities.
c. should never be recorded.
d. should always be recorded.
e. should always be disclosed.

The correct answer is A: lawsuits should be recorded if payment for damages is probable and the amount can be reasonably estimated.

Explanation:

Legal claims or lawsuits against a defendant sometimes represent contingent liabilities because of the fact that the result/outcome of the dispute/controversy is unknown. As a result, considering the outcome of the lawsuit and supposing it may be unfavorable, the defendant should record the item (lawsuit) as a contingent liability on the balance sheet/accounting records. The accountant is to record a lawsuit as a liability provided the amount can be reasonably estimated and the payment for damages caused is highly probable.