At January 1, 2020, Neon Corp. owned a machine that had cost $ 100,000. The accumulated depreciation to date was $ 60,000, estimated residual value was $ 6,000, and fair value was $ 160,000. On January 4, 2020, this machine suffered major damage due to Argon Corp.'s actions and was written off as worthless. In October 2020, a court awarded damages of $ 160,000 against Argon in favour of Neon. At December 31, 2020, the final outcome of this case was awaiting appeal and was, therefore, uncertain. However, in the opinion of Neon's attorney, Argon's appeal will be denied. At December 31, 2020, what amount should Neon accrue for this gain contingency?
A) $ 160,000
B) $ 130,000
C) $ 100,000
D) $ 0

Question

Quizplus · Accepted Answer

According to accounting principles, gain contingencies are not recognized in the financial statements until they are realized or realizable. Since the outcome of the appeal is uncertain as of December 31, 2020, Neon should not recognize any gain related to the lawsuit against Argon.