Question

Gray Co. estimates it is probable that it will receive a $10,000 gain contingency and pay a $4,000 loss contingency. After recording the appropriate journal entries to recognize contingent amounts, how will Gray Co.'s net assets have changed?

Answer 1

Answer : Gray Co.'s net assets will decrease by $4,000

Explanation : As per GAAP , in case of contigent liabilities, when it is probable that the concern future event will occur & the entity can reasonably estimate the amount of liability then contigent liabilities are recorded in the books by debiting the loss & crediting a liability. Since by passing such entry , a liability is estabilished, thus overall net assets decreases.  

In the given question , Gray Co. need to pass entry for contigent liability of $4,000 , thus its decreases the net asst of the company by $4,000.

Again as per GAAP , any contigent assts / gain are never recorded in the books until uless the amount is actually received.

Thus for $10,000 gain contingency , Gray Co. need not to record any entry.