Question

A customer got serious food poisoning from Chix Now restaurant on April 30, 20x2, necessitating a trip to the emergency room. On May 6, 20x2, the customer initiated a lawsuit. At December 31, 20x2, Chix Now estimated its probable loss to be $100,000. In January 20x3, before issuance of Chix Now's financial statements, a judge ruled in favor of the customer and awarded the customer $120,000 in damages. Must the company recognize the effects of this ruling in its 20x2 financial statements

Answer 1

Answer:

Yes the company must recognise the effects of this ruling.

Explanation:

As provided the law suit was initiated in the year 20x2, because of the activity happened in April 20x2.

Accordingly, company was already prepared for a liability of $100,000.

Whenever an event that occurs after the balance sheet is a mere confirmation to what was expected on balance sheet date, or is in alignment with things on record on the balance sheet date, it shall be provided in the balance sheet of that year.

In the given case the law suit was pending on the balance sheet date and was recorded as a liability then, now after the declaration by the judge, the additional liability of $20,000 shall be provided in the financial books of year 20x2.