Joined: 21 Mar 2008 Location: United States
Online Status: Offline Posts: 63
Posted: 27 Nov 2009 at 22:32 | IP Logged
During 1993, Smith Co. filed suit against West, Inc.
seeking damages for patent infringement. At December 31,
1993, 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 1994, Smith was awarded $100,000 and received
full payment thereof. In its 1993 financial statements,
issued in February 1994, how should this award be
reported?
Answer: As a disclosure of a contingent gain of an
undetermined amount in the range of 75000-150000
At December 31, 1992, Date Co. awaits judgment on a
lawsuit for a competitor's infringement of Date's patent.
Legal counsel believes it is probable that Date will win
the suit and indicated the most likely award together
with a range of possible awards. How should the lawsuit
be reported in Date's 1992 financial statements?
Answer: In note disclosure only: Gain contingencies
should not be disclosed with care taken not to mislead
users of F/S as to realization of gain.
My question is: Why isn't the minimum amount which can be
realized from the suit in question 2 accrued and the
range of award which can be won, disclosed in the notes
to F/S? I see the range is probable and estimable in both
questions, but the amounts are not mentioned in Q.2.
Please clear my doubt.
TIA
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Joined: 28 May 2009 Location: United States
Online Status: Offline Posts: 112
Posted: 27 Nov 2009 at 22:54 | IP Logged
As per the rule of conservatism, gain contingencies should not be accrued
until we actually recognized the the gain (when we actually win the suit &
there are no appeals). However, gains should be disclosed when probable &
reasonable estimable. If a range is given then that range s/b disclosed.
It is my understanding from the text & homework questions that the lowest
amount rule applies to probable losses not gains.
Joined: 28 May 2009 Location: United States
Online Status: Offline Posts: 112
Posted: 27 Nov 2009 at 23:34 | IP Logged
Q1 & Q2 are treated the same. I think you might just be reading it too fast.
Q1 = Gain Contingency = We have a range so we will disclose NOT accrue
that range
Q2 = Gain Contingency = We have a ranges so we will disclose that range
also. However, since disclosing a ranges w/out an accrual is not a option on
the MC, our next best answer is the note disclose only MC.
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Topic: Contingencies confusion
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