CPA practice questions and answers

Jim's Jeans is being sued by a former employee for $100,000. The employee is claiming age discrimination. She is twenty-four and was terminated when Jim decided that he wanted all employees to be over the age of sixty-five. Jim's attorney has told him that the employee has a strong case and will probably win. How does this impact Jim's accounting records? Mark one answer:

(A)A note is made on the Balance Sheet regarding the lawsuit.

(B)There is no impact on the financial statement unless the employee wins the suit.

(C)A loss of $100,000 appears in the owner's equity section on the balance sheet.

(D)An entry will appear on the statement of cash flows.

(E)A contingent liability of $100,000 appears on the income statement as an expense.