Contingencies: On December 31, Year 2, Delphine Company estimated it was probabl

Question

Contingencies:

On December 31, Year 2, Delphine Company estimated it was probable it will have to pay something to settle [out-of-court] a claim against Delphine stemming from an alleged breach of Delphine’s contractual obligations that allegedly occurred in Year 2.  Delphine’s management has determined that amount of the settlement is reliably estimated at $30,000.  Delphine is the defendant in this suit.

Required: What impacts will these facts have on the income statement of Delphine for Year 2 and the footnotes in the firm’s financial statements?  Describe.

Income Statement:

Footnotes:

Explanation / Answer

Income statement : since the amount is probable and is relaibly estimated it will be provided as an expense or loss in the income statement.

Footnotes: since the amount is recognised as an expense , the said information will be provided.

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