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    Partnerships and Corporations: major lawsuit probable damages

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    Assume your company is involved in a major lawsuit and the probable damages are estimated to be $2,000,000.
    A. Describe the effects damage estimates would have on the financial statements of a corporation and a partnership.
    B. How do disclosure requirements differ from a corporation to a partnership and what information is required?
    C. Are the shareholders at risk for any personal liability with the company set up as a corporation? Defend your response.
    D. If your company was set up as a partnership, would the partners be at risk for personal liability? Defend your response.

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    Solution Preview

    Assume your company is involved in a major lawsuit and the probable damages are estimated to be $2,000,000.
    A. Describe the effects damage estimates would have on the financial statements of a corporation and a partnership.

    US GAAP is the same for partnerships and corporations for recording the transaction. The difference between the two forms is how the equity section would be impacted.

    For the recording, when a potential liability, called a contingent liability, is "probable," the estimated damages are expensed as a legal expense (or legal loss) and the expense/loss amount is set up as a liability. If the damages are just "possible" (less likely than probable), they are disclosed but not expensed and accrued as a liability. ...

    Solution Summary

    478 words comparing and contrasting two ownership types (partnerships and corporations).

    $2.19

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