A factory owned by XYZ Inc. was destroyed by fire. XYZ inc. lodged an insurance claim for the value of the factory building, plant, and an amount equal to one year’s net profit. During the year there were a number of meetings with the representatives of the insurance company. Finally, before year-end, it was decided that XYZ Inc. would receive compensation for 90% of its claim. XYZ Inc. received a letter that the settlement check for that amount has been mailed, but it was not received before year-end. How should XYZ Inc. treat this in its financial statements? Because the settlement of the claim was conveyed by a letter from the insurance company that also stated that the settlement check was in the mail for 90% of the claim, record 90% of the claim as a receivable as it is virtually certain that the contingent asset will be received. Wait until next year when the settlement check is actually received and not recognized or disclose this receivable at all since at year-end it is a contingent asset. Disclose the contingent asset in the footnotes. Because the settlement of the claim was conveyed by a letter from the insurance company that also stated that the settlement check was in the mail for 90% of the claim, record 100% of the claim as a receivable as it is virtually certain that the contingent asset will be received, and adjust the 10% next year when the settlement check is actually received.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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A factory owned by XYZ Inc. was destroyed by fire. XYZ inc. lodged an insurance claim for the value of the factory building, plant, and an amount equal to one year’s net profit. During the year there were a number of meetings with the representatives of the insurance company. Finally, before year-end, it was decided that XYZ Inc. would receive compensation for 90% of its claim. XYZ Inc. received a letter that the settlement check for that amount has been mailed, but it was not received before year-end. How should XYZ Inc. treat this in its financial statements? Because the settlement of the claim was conveyed by a letter from the insurance company that also stated that the settlement check was in the mail for 90% of the claim, record 90% of the claim as a receivable as it is virtually certain that the contingent asset will be received. Wait until next year when the settlement check is actually received and not recognized or disclose this receivable at all since at year-end it is a contingent asset. Disclose the contingent asset in the footnotes. Because the settlement of the claim was conveyed by a letter from the insurance company that also stated that the settlement check was in the mail for 90% of the claim, record 100% of the claim as a receivable as it is virtually certain that the contingent asset will be received, and adjust the 10% next year when the settlement check is actually received.

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