ExpertMedium1 markMultiple Choice
CPA · Question 50 · Area III: Select Transactions
A company has a December 31 year-end. On February 1, Year 2, the company settled a lawsuit for $100,000. The lawsuit had been filed in November, Year 1, and the company had previously accrued $70,000 based on the best estimate at year-end. The financial statements are issued on March 1, Year 2. What amount should be reported as the liability in the December 31, Year 1 Balance Sheet?
A company has a December 31 year-end. On February 1, Year 2, the company settled a lawsuit for $100,000. The lawsuit had been filed in November, Year 1, and the company had previously accrued $70,000 based on the best estimate at year-end. The financial statements are issued on March 1, Year 2. What amount should be reported as the liability in the December 31, Year 1 Balance Sheet?
Answer options:
A.
$70,000
B.
$100,000
C.
$0
D.
$30,000
How to approach this question
Settlement of litigation is the classic Type I (Recognized) event. It provides better evidence of the condition that existed at year-end. Adjust the numbers.
Full Answer
B.$100,000✓ Correct
The settlement of a lawsuit that existed at the balance sheet date is a recognized (Type I) subsequent event. It provides additional evidence about conditions that existed at the date of the balance sheet. The financial statements should be adjusted to reflect the actual settlement amount of $100,000.
Common mistakes
Disclosing only. Keeping the original estimate.
Practice the full CPA FAR Practice Exam 3
50 questions · hints · full answers · grading
More questions from this exam
Q01Dunn Corp. is preparing its Year 1 balance sheet. The following issues were identified during the...HardQ02On October 1, Year 1, Host Co. approved a plan to dispose of a component of its business. The dis...HardQ03Selected financial information for Zeno Corp. for the year ended December 31, Year 1:<br/>- Cost ...MediumQ04Parch Co. owns 80% of Scribe Inc. During Year 1, Parch sold inventory to Scribe for $500,000. The...HardQ05A company had the following equity transactions in Year 1:<br/>- Jan 1: 100,000 shares outstandin...Hard