At December 31,2020, a firm is evaluating a contingent liability as part of their annual financial reporting. They consider the loss probable and expect to pay $400,000. One year later, the case is still on-going, and the firm expects that the loss is still probable and the most likely amount is $500,000. At December 31, 2021, the firm updates their estimate. The court case settles on May 31, 2022. The firm pays $425,000 to settle the case. What effect does the contingent liability have on net income in each year, respectively?

At December 31,2020, a firm is evaluating a contingent liability as part of their annual financial reporting. They consider the loss probable and expect to pay $400,000. One year later, the case is still on-going, and the firm expects that the loss is still probable and the most likely amount is $500,000. At December 31, 2021, the firm updates their estimate. The court case settles on May 31, 2022. The firm pays $425,000 to settle the case. What effect does the contingent liability have on net income in each year, respectively?

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter17: Advanced Issues In Revenue Recognition

Section: Chapter Questions

Problem 6P

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