Question

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:

Multiple Choice

• A receivable and deferred revenue of $40 million.

• A receivable and revenue of $40 million.

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

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

Answer 1

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

Because in march 2022 it is a contigent asset for Z Co.

Contigent asset is a possible asset that may arise because of a future uncertain event that are not in control of the entity. As per accounting standard, contigent asset should recognise as a gain even if the gain is probable.Contigent asset can be disclose as a note in the financial statements