How should Canada Dry account for the lawsuit filed against it because its ginger ale allegedly does not contain ginger root?

A woman has filed a lawsuit against Canada Dry and its parent company Keurig Dr Pepper[1] (NYSE: KDP), claiming that its ginger ale does not contain enough ginger to be a healthier alternative to sodas. The plaintiff purchased Canada Dry ginger ale when her children were sick, because she thought it would soothe their stomachaches due to the ginger root in the ginger ale. The attorney for the woman stated that a laboratory analysis of the ingredients of the ginger ale indicated it contained carbonated water, high fructose corn syrup, citric acid, preservatives and natural flavors. The “natural flavors” were allegedly flavor extracts not from ginger and a miniscule amount of a ginger flavor extract.

The lawsuit contends that Canada Dry is misleading its customers.

Questions

1. What is a contingent liability?
2. What are the three potential accounting treatments for a contingent liability?
3. In your opinion, how do you think Keurig Dr Pepper/Canada Dry will treat this contingent liability from an accounting standpoint?

[1] Keurig Dr Pepper is the resultant company from the merger of Keurig Green Mountain, Inc., and Dr Pepper Snapple Group, Inc., in 2018.

Instructor Resources

These resources are provided to give the instructor flexibility for use of Accounting in the Headlines articles in the classroom. The blog posting itself can be assigned via a link to this site OR by distributing the student handout below. Alternatively, the PowerPoint file below contains a bullet point overview of the article and the discussion questions.

• Student handout (pdf) (word) (contains entire blog posting + discussion questions)
• PowerPoint file (brief article overview + discussion questions)

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