ExpertEasy1 markMultiple Choice
CPA · Question 49 · Area III: Select Transactions
A company is the plaintiff in a lawsuit. Legal counsel states it is probable the company will win $1,000,000. How should this be reported?
A company is the plaintiff in a lawsuit. Legal counsel states it is probable the company will win $1,000,000. How should this be reported?
Answer options:
A.
Accrue $1,000,000 gain.
B.
Accrue $1,000,000 gain and disclose.
C.
No disclosure or accrual.
D.
Disclose in notes only.
How to approach this question
Gain Contingencies: Never accrue (conservatism). Disclose if probable/material. Recognize only when realized (cash received/final judgment).
Full Answer
D.Disclose in notes only.✓ Correct
Gain contingencies are not recognized in the financial statements until realized. If probable, they should be disclosed.
Common mistakes
Accruing probable gains (symmetry with probable losses is NOT applied).
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