Example: Heat Corporation is a construction company that builds apartments. On June 25, after the end of working day, workers forgot to lock the entrance to the construction area. The children in the neighborhood entered the area and started to play with hoist. One of the children felt down and broke his arm. His parents filed a lawsuit against the company for damages claiming an indemnity of 100,000 TL.

In this case, Heat Corporation should, at first, examine the probability of losing the lawsuit. If it is probable, then the second criteria of measurement reliability is considered. There are three possible cases and three treatments by Heat Corporation;

a. Almost impossible to lose the lawsuit; so does not pay any indemnity – No Liability Reported

b. Probably will lose the lawsuit, however the amount of indemnity cannot be estimated reliably – Liability Disclosed in Footnotes

c. Probably will lose the lawsuit and the amount of indemnity can be estimated reliably – Journalized and Reported in Financial Statements

Suppose that the third option occurs and the experiences from other cases signals that company will pay approximately 30,000 TL as indemnity. Then company must record a liability of 30,000 TL in its balance sheet as well as an expense (for probable loss) in income statement.

The correct answer is D.