Invern, Inc. has a self-insurance plan. Each year, retained earnings is appropriated for contingencies in an amount equal to insurance premiums saved less recognized losses from lawsuits and other claims. As a result of a 2006 accident, Invern is a defendant in a lawsuit in which it will probably have to pay damages of $190,000. What are the effects of this lawsuit’s probable outcome on Invern’s 2006 financial statements?
An increase in expenses and no effect on liabilities.
An increase in both expenses and liabilities.
No effect on expenses and an increase in liabilities.
No effect on either expenses or liabilities.
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