Question

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?

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.