KR Corporation was involved in a lawsuit with the Government alleging inadequate air pollution control facilities at its Glowworm plant site during 2013.At December 31, 2016, it appeared probable the Government would settle for approximately $150,000.This event should be recorded (i.e., recognized)in 2016 as a(n):
A)Unusual loss.
B)Loss on the lawsuit (operating expense).
C)Prior period adjustment.
D)Disclosure of contingency loss only in a note.
E)Unusual gain.

Question

Quizplus · Accepted Answer

The correct answer is B) Loss on the lawsuit (operating expense). This is because when a company is involved in a lawsuit and it is probable that the company will incur a loss, and the amount can be reasonably estimated, the loss should be recognized in the financial statements of the period the event occurred or was confirmed. In this case, since it appeared probable by December 31, 2016, that the Government would settle for approximately $150,000, this amount should be recognized as a loss on the lawsuit, which is typically categorized as an operating expense.

KR Corporation Was Involved in a Lawsuit with the Government