[sillyapplepie]

Facts: Wimbledina Company is preparing its December 31, Year 6, financial statements that are to be issued on March 31, Year 7. The following subsequent events must be analyzed to determine their effect, if any, on the Year 6 financial statements.

An insurance claim relating to a small fire that occurred in November, Year 6, was settled, and Wimbledina was paid$ 120,000 in February, Year 7.

Answer: No journal entry, because it is a gain contingency in which journal entries are not recorded until they occur.

My question: Wasn’t the insurance claim already settled, so why is it still a gain contingency? How about loss contingency–do you record it in subsequent events?

Thank you so much!

[JoeManco25]

The question has stated that it was a subsequent event, so I would assume it was settled after the balance sheet date.

Loss contingencies are recorded and disclosed based on whether its remote, reasonably possible, or probable.

[DS]

Gains are only accrued when realized. As stated in the question, they did not receive the funds until February so it is not accrued. It should be disclosed though.

If instead it were a liability such as a lawsuit, the payment would be accrued either as a new accrual or as an adjustment to the amount of the contingent liability that was previously accrued.

[sillyapplepie]

Thank you so much everyone! 🙂 That was very helpful

[Author]

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