A city experienced several auto damage claims during its year ended December 31,2012.The total amount claimed was $600,000.No cash was paid out in 2012.However,claims totaling $200,000 were settled by December 31,2012.These claims were settled for $80,000,and were scheduled for payment on January 15,2013.City attorneys felt that the remaining $400,000 of claims could be settled during 2013 for about $160,000.How much should the city recognize as claims expenses in its government-wide financial statements for 2012?

Question

Quizplus · Accepted Answer

According to the accrual basis of accounting, expenses should be recognized when they are incurred, regardless of when they are paid. In this case, the city experienced auto damage claims totaling $600,000 during the year ended December 31, 2012. However, only $200,000 of claims were settled by the end of the year, and the remaining $400,000 of claims were expected to be settled in 2013 for about $160,000. Therefore, the city should recognize the portion of the claims that were incurred but not settled as an expense in its government-wide financial statements for 2012.

The amount to be recognized as claims expenses is calculated as follows: 
Total claims incurred during the year = $600,000 
Less: Claims settled by December 31, 2012 = $80,000 
Remaining claims to be recognized as expenses = $520,000 ($600,000 - $80,000) 
Expected settlement cost of remaining claims = $160,000 
Therefore, the city should recognize $240,000 ($520,000 x $160,000/$400,000) as claims expenses in its government-wide financial statements for 2012.

A City Experienced Several Auto Damage Claims During Its Year