Martin Pharmaceutical Co. is currently involved in two lawsuits. One is a class-action suit in which consumers claim that one of Martin’s best-selling drugs caused severe health problems. It is reasonably possible that Martin will lose the suit and have to pay $20 million in damages. Martin is suing another company for false advertising and false claims against Martin. It is probable that Martin will win the suit and be awarded $5 million in damages. What amount should Martin record on its financial statements as a result of these two lawsuits?
A. $0
B. $5 million income
C. $15 million expense
D. $20 million expense
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The class-action lawsuit is reasonably possible which grants a 50/50 chance but not probable which is to be greater than 51%. This leads to a liability for the class-action lawsuit not being accrued. Contingent liabilities are recognized only when the occurrence is probable and estimable.
On the other hand, the contingent asset will not be recognized until the amount is actually received even though the outcome is stated to be probable and estimable.
A. $0