Question

Wacky Entertainment Inc. is in the middle a copyright lawsuit. Next month, the company anticipates winning $500,000 in the settlement. How should Wacky Entertainment record the $500,000 this month?

a. As a gain on the income statement
b. As a liability on the income statement
c. As revenue on the income statement
d. As a footnote of the financial statements
e. It should not be reported

Answer 1

Answer: d. As a footnote of the financial statements

Step-by-step explanation:

The settlement that the company expects is contingent in nature and should only be recognised in the statements if it is probable that it will happen.

The company anticipates that it will win this therefore making it probable that it will do so. The amount is also quantifiable as well. However, going by the Accrual principle in Accounting, revenue is only recorded when earned.

The Gain Contingent will have to be recorded as a footnote until it is realized then it can be recorded.