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