Question

Ace Co. settled litigation on February 1, Year 2, for an event that occurred during Year 1. An estimated liability was determined as of Dec 31, Year 1. This estimate was significantly less than the final settlement. The transaction is considered to be material. The year-end financial statement for Year 1 have not been issued. How should the settlement be reported in Ace's Year 1 financial statements?

Answer 1

Answer:

The Options include:

a. Disclosure only of the settlement

b. Only an accrual of the settlement

c. Neither a disclosure nor an accrual

d. Both a disclosure and an accrual. is Correct

Explanation:

Since about the 1st of February, the financial information of Ace Co., Year 2, have not been obtained and the exact amount of the final settlement is established.

The whole amount must be included in the financial information of Ace Co. on December 31, Year 1 and reported as a "subsequent event."

That is an acknowledged subsequent event because it contributes to litigation originating in year 1.