Nicole, Inc. uses IFRS for its external financial reporting. During 2013, an employee ofthe company was injured in the factory. Discussions with corporate attorneys resulted in adetermination that the company would be required to pay between $1,500,000 and$3,000,000 to settle the injury claim. Nicole, Inc. accrued a contingent liability onDecember 31, 2013 for $1,500,000. On February 4, 2014, Nicole, Inc. settled the lawsuitfor $3,300,000. What amount of loss should be reported on the income statement for theyear ended December 31, 2014 for Nicole, Inc. related to this lawsuit?
A) $3,300,000
B) $1,800,000
C) $1,500,000
D) $300,000.

Question

Quizplus · Accepted Answer

Nicole, Inc. accrued a contingent liability for $1,500,000 on December 31, 2013. This means that the company estimated that it would need to pay somewhere in between $1,500,000 and $3,000,000 to settle the lawsuit, and chose to recognize the minimum amount of the range as a liability on the financial statements. However, on February 4, 2014, Nicole actually paid $3,300,000 to settle the lawsuit, which is $1,800,000 more than what was originally estimated as the liability. Therefore, the company needs to recognize this $1,800,000 as a loss on the 2014 income statement, and the correct answer is B. Option A is incorrect because $3,300,000 is the total amount paid to settle the lawsuit, not the amount of loss. Option C is incorrect because $1,500,000 was already recognized as a liability in 2013. Option D is incorrect because that amount does not reflect the actual settlement paid by the company.