Question

A company name Lake Real Estate Ltd. is in the business of Real Estate. It purchased a piece of property by paying a very high price. A few months after the purchase, someone slipped and fell on the property and became seriously injured. The injured party is currently suing Lake Real Estate for negligence. It is probably that LRE will loose the lawsuit. If the principle of Full Disclosure is being correctly followed in the company, which of the following is correct?

• A. LRE should not do anything with regard to this
• B. LRE should disclose the lawsuit in the footnotes & also show a contingent liability for the same
• C. LRE should bribe the judge & try to win the case
• D. LRE should not disclose it anywhere as it is not a business transaction

Answer 1

The correct option is B LRE should disclose the lawsuit in the footnotes & also show a contingent liability for the same

Full disclosure principle requires all the information has to be disclosed in the financial statements either on the face of the financial statements or in the notes to the financial statements. Hence, the contingent liabilities should be shown as a footnote or explanatory notes in the balance sheet of a firm as per Convention of full disclosure.