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In: Accounting

Skill Hardware is the plaintiff in a $16 million lawsuit filed against a supplier. The litigation...

Skill Hardware is the plaintiff in a $16 million lawsuit filed against a supplier. The litigation is in final appeal and legal counsel advises that it is virtually certain that Skill will win the lawsuit and be awarded $12 million. How should skill account for this event?

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Expert Solution

Contingent Asset is the asset which may or may not be Realised in Future and depend on Future event. It is the potential benefit which may arise in Future based on occurence of Future uncertain event.

1)According to Conservatism and Accounting Standard Contingent Asset should not be recognise until is is realised or there is Certainty of realisation ( Not to recognised when gain is Probable only )

2) Contingent Asset become Realised when realisation is associated with Virtual Certainty

2) where as for Liability is should be recognise and accounted for Contingent Liability even there is no certainty .

From above Case Skill Hardware will not recognize as legal counsel advise for Certainty this is probable and not actual certainty.

This Event is related to Gain Contingency and and as gain contingenty are not accrued is will not recorded until it actually realise or become certain ( ie Judgment pass relating to law suit ) .

As it is probable that contingent Asset will occur and estimated , it should be disclosed in Financial Statement under disclosure note


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