Assume That Krenzel Company Is Subject to a Class Action

question 13

Multiple Choice

Assume that Krenzel Company is subject to a class action lawsuit from its customers resulting from the failure of one of its projects.The suit was filed on November 10,2012 and properly disclosed in Krenzel's December 31,2012 financial statements.How would a settlement of this lawsuit on January 17,2013 be properly reflected in Krenzel's financial statements?

• A) The financial statements would not reflect the settlement of the lawsuit because it occurred after the date of the financial statements.
• B) Krenzel would prepare pro forma financial statements to reveal the effects of this settlement.
• C) Krenzel would adjust its disclosure of the lawsuit to reflect the effects of this settlement.
• D) Krenzel would provide a separate disclosure to persons known to be relying on its financial statements to describe the effects of this settlement.

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Definitions:

Expected Return

The predicted amount of profit or loss an investment is expected to generate over a specific time period.

Probability Distribution

A mathematical formulation that presents all potential values and their chances for a random variable within a particular range.

Real Rate of Return

The annual percentage profit earned on an investment, adjusted for changes in the price level due to inflation or deflation.

Annual Interest Rate

The percentage increase in money per year when it is lent or invested, excluding the effects of compounding.