German Auto Parts Is a Defendant in a Multi-Million Dollar

German Auto Parts is a defendant in a multi-million dollar lawsuit that was filed in a prior year. The lawsuit was not previously disclosed in the financial statements or accompanying footnotes, as the company has vigorously defended its position and its attorneys initially indicated that the claim was not valid. During the current year, however, the facts and circumstances have changed such that the likelihood of a loss approximating $5 million is now considered reasonably possible. How should the company recognize this lawsuit in its current year financial statements?

A) Do nothing, since it was not recognized in previous periods.
B) Do nothing until the matter is settled or a judgment or verdict is obtained.
C) Disclose the matter in the footnotes accompanying the financial statements.
D) Record a contingent liability in the amount of $5 million.

Correct Answer:

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