A city experienced several auto damage claims during its year ended December 31, 2019. The total amount claimed was $600,000. No cash was paid out in 2019. However, claims totaling $200,000 were settled by December 31, 2019. These claims were settled for $80,000 and were scheduled for payment on January 15, 2020. City attorneys felt that it was highly probable that the remaining $400,000 of claims would be settled during 2020 for about $160,000.
How much should the city recognize as claims expenses in its government-wide financial statements for 2019?

Question

Quizplus · Accepted Answer

Under accrual accounting, expenses are recognized when the liabilities are incurred, regardless of when the cash outflows occur. Therefore, the city should recognize a liability of $240,000 ($180,000 + $60,000) for the claims that are expected to be paid during 2020.

A City Experienced Several Auto Damage Claims During Its Year