Z Co. filed suit against W Inc. in 2021 seeking damages for patent infringement. At December 31, 2021, legal counsel for Z believed that it was probable that Z would be successful against W for an estimated amount in the range of $30 million to $60 million, with each amount in that range considered equally likely. Z was awarded $40 million in April 2022. Z should report this award in its 2021 financial statements, issued in March 2022 as:

a. A receivable and deferred revenue of $40 million.

b. A receivable and revenue of $40 million.

c. A disclosure of a gain contingency of $40 million.

d. A disclosure of a gain contingency of an undetermined amount in the range of $30 million to $60 million.

Question

Business

Maverick Malone

23 December, 21:55

Z Co. filed suit against W Inc. in 2021 seeking damages for patent infringement. At December 31, 2021, legal counsel for Z believed that it was probable that Z would be successful against W for an estimated amount in the range of $30 million to $60 million, with each amount in that range considered equally likely. Z was awarded $40 million in April 2022. Z should report this award in its 2021 financial statements, issued in March 2022 as:

a. A receivable and deferred revenue of $40 million.

b. A receivable and revenue of $40 million.

c. A disclosure of a gain contingency of $40 million.

d. A disclosure of a gain contingency of an undetermined amount in the range of $30 million to $60 million.

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Answers (1)

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Amy Austin · Answer 1

d. A disclosure of a gain contingency of an undetermined amount in the range of $30 million to $60 million.

Explanation:

Data provided in the question

Estimated amount range in between $30 million to $60 million

Now awarded amount = $40 million

So the financial statement should be recorded a disclosure of a gain contingency i. e to be undetermined between the range of $30 million to $60 million

As according to the GAAP the contingency gain should be recognized until it is realized plus the disclosure should also be shown on the footnotes and proper accuracy should be maintained so that it can avoid the misleading information