A city accounts for its hospital in an Enterprise Fund.An individual brings a malpractice suit against the hospital in 2013.City lawyers are concerned about losing the case if it goes to court,but estimate that it is probable they can settle it out of court for $50,000.In any event,the city does not expect any cash outflows on the claim for several years.How should the Enterprise Fund report this item in its statements for the year ended December 31,2013?
A)no reporting is necessary
B)the situation should be reported only by means of note disclosure
C)the enterprise fund should report a claims expense and a current liability of $50,000
D)the enterprise fund should report a claims expense and a noncurrent liability of $50,000

Question

Quizplus · Accepted Answer

The correct answer is D because according to accounting standards, when a loss is probable and the amount can be reasonably estimated, it should be recorded as a liability. Since the city does not expect any cash outflows for several years, the liability is classified as noncurrent.

A City Accounts for Its Hospital in an Enterprise Fund