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:

Answer 1

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

Step-by-step explanation:

This is related to a Gain Contingency which is when an amount is likely to be received in future from litigation. Gain contingencies should not be recorded until they are actually received because it will overstate revenue.

The proper thing to do would be to record it in the notes accompanying the financial statements as a disclosure with the range of the amount expected. In this case therefore the company will record a disclosure of a gain contingency of an undetermined amount in the range of $30 million to $60 million.