Question

After the end of the 2022 fiscal year but before financial statements were issued, Palladin Company learned that an arbitrator had made a $15 million judgment in a litigation case against it. The claim had been made in 2021 for alleged defects of products sold in 2020. Prior to learning of the judgment, Palladin had not accrued any litigation loss, and does not plan to appeal. For the 2022 fiscal year, Palladin should:

Multiple Choice

• Disclose the potential for a judgment in the notes, but not indicate the amount, since the judgment was made after fiscal year end.

• Disclose in the notes that a $15 million judgment was made after fiscal year end.

• Accrue a $15 million liability and explain it in a note to the financial statements.

• Do nothing relative to the contingency.

Answer 1

Answer:

Accrue a $15 million liability and explain it in a note to the financial statements.

Because as per the accounting principle of conservatism or convention of conservatism, we should anticipate and account for all the possible losses,but not profits. Since the claim have been made in 2021 we should take it as a future possible loss and should be shown in our accounts.