Question

A6. (Contingencies) The Kuttner Corp. is sued in 2014 for violating patent laws. In 2014, the...

A6. (Contingencies) The Kuttner Corp. is sued in 2014 for violating patent laws. In 2014, the Kuttner Corp. decides that a loss is probable, and records an expense of $23 million. What is the effect on income in 2016 if the case is settled in that year for:

   A. $23 million
   B. $20 million
   C. $30 million?

Homework Answers

Answer #1

a) Estimated expense and liability created in advance is $23 million. Expense actually incurred is also $23 million. Therefore there will be no effect on income.

b) Estimated expense and liability created in advance is $23 million. Expense actually incurred is $20 million. Since the actual expenditure is less than what is determined in advance, the income will increase by $3 million.

c) Estimated expense and liability created in advance is $23 million. Expense actually incurred is $30 million. Since the actual expenditure is more than what is determined in advance, the income will reduce by $7 million.

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