On January 3, 2009, Acme Corp. owned a machine that had cost $300,000. The accumulated depreciation was $180,000, estimated salvage value was $18,000, and fair market value was $480,000. On January 4, 2009, this machine was irreparably damaged by Reed Corp. and became worthless. In October 2009, a court awarded damages of $480,000 against Reed in favor of Acme. At December 31, 2009, the final outcome of this case was awaiting appeal and was, therefore, uncertain. However, in the opinion of Acme's attorney, Reed's appeal will be denied. As of December 31, 2009, do we have a loss contingency, a gain contingency, or both? How should this be accounted for in the financial statements? Be sure to use the requirements of Codification Section 450 (FASB 5) to explain your answer.

ASC 450-Accounting Standards codification (FASB 5) provides rules for acceptable accounting practices in relation to both loss and gain contingencies.

GAIN CONTINGENCY, but not loss contingency, is a matter of importance in the given cases. In the event of a favorable judgment on Acme, $480000 will be received which will be considered revenue because the total loss due to damage to the machinery has already been deducted from revenue on the basis of USGAAP.

LOSS CONTINGENCY is not the case. Because there is no damage or loss to REED and, in the event of an unfavorable outcome, Acme is not expected to pay for any damages, except for possible legal fees. In the case of an appeal brought by the opponent, the possibility of claiming legal expenses is very remote.

Following two point are important in deciding the application of the FASB 5

1. Acme had won the case in the lower court.

2. Amount of gain is quantifiable in the event of a favorable outcome.

As provided in the FASB 5, recognisation of such gain in financial statements leads to recognisation of future income and it is against the prudence concept of accountancy.

In view of all the issues, management is advised to disclose the amount of potential gain, but does not include income statement.