[Sandy]

There is one TBS in the sample test related contingent liability and I couldn’t understand. Could someone please explain?

On October 15, year 3, one of REV’s facilities sustained significant water damage. At your request, we contacted the property insurance carrier to check on the status of the $2,500,000 claim that REV filed on November 15, year 3. On December 27, year 3, the property insurance carrier acknowledged that the losses appear to be covered by the insurance policy. However, the property insurance carrier stated that its adjuster is still reviewing the claim and does not expect to settle it until March, year 4. The property insurance carrier further indicated that any payment is subject to the $125,000 deductible included in the property insurance policy.

The answer is : required to be disclosed in the notes
but the accrural amount is 0

my question is, since we expect to incur $125000 deductible, why don’t we accrue such amount?

[PTBP2018]

Hello,
Since the losses will be covered by the insurance policy, I believe a gain contingency would exist (an expected favorable settlement). The deductible would net against the settlement paid out in Y4. I believe that in Y3, the deductible would just be disclosed, because generally gain contingencies are not accrued.

AUD - 80
BEC - 84
FAR - 83
REG - 75

 

"Develop success from failures. Discouragement and failure are two of the surest stepping stones to success." --Dale Carnegie

[Author]

Replies