Question

On January 3, 2012, Boyer Corp. owned a machine that had cost $300,000. The accumulated depreciation was $180,000, estimated salvage value was $18,000, and fair value was $480,000. On January 4, 2012, this machine was irreparably damaged by Pine Corp. and became worthless. In October 2012, a court awarded damages of $480,000 against Pine in favor of Boyer. At December 31, 2012, the final outcome of this case was awaiting appeal and was, therefore, uncertain. However, in the opinion of Boyer's attorney, Pine's appeal will be denied. At December 31, 2012, what amount should Boyer accrue for this gain contingency?

a. $480,000.
b. $390,000.
c. $300,000.
d. $0

Answer 1

Boyer Corp. should not accrue any amount related to the gain contingency at December 31, 2012, since the outcome of the court case is uncertain, and the gain is not realized yet.

Step-by-step explanation:

The question is regarding the amount that Boyer Corp. should accrue for a gain contingency at December 31, 2012. Accounting principles stipulate that companies should not recognize gain contingencies until they are realized. Considering the circumstances presented, where the final outcome is uncertain, it would not be appropriate for Boyer Corp. to accrue the $480,000 as a gain at this point. Although Boyer's attorney believes that Pine's appeal will be denied, this is not sufficient grounds to recognize the revenue due to the principle of conservatism in accounting.

Therefore, the correct amount that Boyer Corp. should accrue for this gain contingency is:

$0