Question

PayPo Corp sued ChayChay Corp for violating a license agreement. As of the end of 2019, the lawsuit is not settled but PayPo expects there is a high probability that they will receive a settlement between $200,000 and $500,000 within the next year. How much, if any, of the settlement should PayPo recognize as a contingent gain on the 2019 financial statements?

Select one:

$0

$200,000

$500,000

$0 but PayPo should disclose it in the financial statements

$350,000

Answer 1

A contingent gain is the gain which has the higher probability to occur in the future. It should not be recognized in the statements unless it occurs, but should be disclosed in the financial statements.

In the given case, there is a higher probability that the gain occurs between $200,000 and $500,000 within the next year. This means that there is a higher probability that the gain occurs in the future.

Hence such probability of the occurence should be disclosed in the financial statements, rather than recognizing in the financial statements.

Correct Option: $0 but PayPo should disclose it in the fianancial statements