Heimbaugh County recently lost a lawsuit that it had been defending in court for two years relating to an incident involving one of the county's police officers. The county had always deemed a loss to be improbable. However, a judgment was ultimately rendered against the county and, immediately prior to the current fiscal year end, the county was ordered to pay a total of $300,000. $75,000 is due at year end but payment had not been completed. The remainder is to be paid in installments of $75,000 for an additional three years. How will the external financial statements of the county be affected in the year the court case was settled?

Question

Quizplus · Accepted Answer

The General Fund statements should report expenditures and a current liability of $75,000 (due at year end) and the General Long-Term Liabilities accounts should report a liability of $225,000 (the remaining installments to be paid over the next three years). This is because the county will need to make the $75,000 payment in the current year, and the remaining $225,000 will be paid in future years, making it a long-term liability. The county does not need to report a claims and judgments liability of $300,000 on the General Fund statements because only the portion due within the year is considered a current liability. Additionally, there is no prior period adjustment needed since the liability was incurred and settled in the current fiscal year.

Heimbaugh County Recently Lost a Lawsuit That It Had Been