Question 30Q

Question

On January 30, 2016, a suit was filed against Frazier Corporation under the Environmental Protection Act. On August 6, 2017, Frazier Corporation agreed to settle the action and pay $920,000 in damages to certain current and former employees. How should this settlement be reported in the 2017 financial statements? Discuss.

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Answer

The settlement of the lawsuit would be considered a non-operational expense.

1Meaning of Financial statements

Financial statements are the progress reports of the business entities that are prepared to ascertain the overall growth of the business. Such reports are prepared annually and communicated to various concerned users.

2Treatment of lawsuit

According to the situation mentioned above, the company should create a provision for the lawsuit in the books on December 31, 2016, but the company has not done the same.

At present, the company must show the settlement amount as an expense in the income statement’s non-operating expense.

Question 29Q

Question 31Q

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