Question

During Year 4, Smith Co. filed suit against West, Inc., seeking damages for patent infringement. At December 31, Year 4, Smith’s legal counsel believed that it was probable that Smith would be successful against West for an estimated amount in the range of $75,000 to $150,000, with all amounts in the range considered equally likely. In March Year 5, Smith was awarded $100,000 and received full payment thereof. In its Year 4 financial statements issued in February Year 5, how should this award be reported?

Answer 1

Answer:

Contingent gains will not be reported on the financial statements of year 4.

Explanation:

As the Calim amount will benefit the Smith Co. so it is classified as the gain. In year 4 there is a probability of estimated gain in the range of $75,000 to $150,000. This is an contingent gain which is not realized until the end to year 4. As $100,00 is received in year 5, so it will not be reported in the financial statement of year 4. The contingent gain are not reported on the financial statements. The Revenues / Gains are reported when they are realized and Expenses / losses are reported when they are expected to incurr.