Question

Blackwell Manufacturing uses the accrual method and reports on a calendar year. This year a customer was injured when visiting the Blackwell factory. The customer sued the company for $500,000, and the case is still being litigated. However, Blackwell's attorney expects that the company will pay at least $250,000 to settle the claim. What amount, if any, can Blackwell deduct for the expected claim settlement this year?

Answer 1

For Blackwell Manufacturing, using the accrual accounting method, they should deduct $250,000 for the expected claim settlement this year as that is the amount their attorney expects to pay.

Step-by-step explanation:

Blackwell Manufacturing, which uses the accrual method of accounting, potentially has to settle a claim where the company's attorney expects a settlement of at least $250,000. According to the accounting principles that govern accrual-based accounting, businesses must record expenses when they are incurred, not necessarily when they are paid. Since the attorney expects that the company will pay at least $250,000, Blackwell should record this amount as an expense in the current year. This is based on the matching principle, which states that expenses should be recognized in the period in which they are incurred if they can be reliably estimated. The amount that Blackwell can deduct for the expected claim settlement this year is $250,000.