The Blaxland Ltd filed a lawsuit against D-Mart Machineries for failure to comply with the specifications of the factory equipment that they ordered and received.The solicitors for Blaxland Ltd strongly believe that the company will receive $50,000 to $100,000 if they win the case.Which action is consistent with the Framework?
A)Blaxland Ltd.should recognise a receivable of $75,000,the expected value of the gain.
B)Blaxland Ltd.should recognise a receivable of $50,000,a conservative estimate of the gain.
C)Blaxland Ltd.should not recognise the receivable until it is probable that they have won the case.
D)Blaxland Ltd.should not recognise the receivable because while the solicitor is expecting to win the case,the receivable cannot be estimated reliably.
E)None of the given answers.

Question

Quizplus · Accepted Answer

The appropriate accounting treatment for contingent gains, such as the potential outcome of a lawsuit, is guided by accounting principles such as the International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP), depending on the jurisdiction in which Blaxland Ltd operates.
Under both IFRS and GAAP, a contingent asset (which in this case would be the potential receivable from winning the lawsuit) is not recognized in the financial statements until it is virtually certain that the inflow of economic benefits will occur. The recognition of such gains is typically conservative to avoid overstating assets and income.
Given the options provided:
1. Blaxland Ltd. should recognize a receivable of $75,000, the expected value of the gain.
2. Blaxland Ltd. should recognize a receivable of $50,000, a conservative estimate of the gain.
3. Blaxland Ltd. should not recognize the receivable until it is probable that they have won the case.
4. Blaxland Ltd. should not recognize the receivable because while the solicitor is expecting to win the case, the receivable cannot be estimated reliably.
5. None of the given answers.
The correct action consistent with the accounting framework would be:
3. Blaxland Ltd. should not recognize the receivable until it is probable that they have won the case.
This is because the outcome of the lawsuit is uncertain and the recognition of such a receivable would be premature. It is not appropriate to recognize contingent gains before a favorable outcome is confirmed. Once the gain is realized or virtually certain, then it can be recognized in the financial statements.
Option 4 is also a valid consideration because if the receivable cannot be reliably estimated, it should not be recognized. However, in this scenario, the solicitors have provided an estimate range ($50,000 to $100,000), so the issue is not the reliability of the estimate but the uncertainty of the outcome. Therefore, option 3 is the most appropriate choice based on the information given.

The Blaxland Ltd Filed a Lawsuit Against D-Mart Machineries for Failure