Tone Company is the defendant in a lawsuit filed by Witt in 1997 disputing the validity of
Question:
Tone Company is the defendant in a lawsuit filed by Witt in 1997 disputing the validity of a copyright held by Tone. At December 31, 1997, Tone determined that Witt would probably be successful against Tone for an estimated amount of $800,000. Appropriately, an $800,000 loss was accrued by a charge to income for the year ended December 31, 1997. On December 15, 1998, Tone and Witt agreed to a settlement providing for cash payment of $500,000 by Tone to Witt and transfer of Tone's copyright to Witt. The carrying amount of the copyright on Tone's accounting records was $120,000 at December 15, 1998. What would be the effect of the settlement of this liability on Tone's income before income tax in 1998?
a. No effect.
b. $120,000 decrease.
c. $180,000 increase.
d. $300,000 increase.
Step by Step Answer:
Financial Accounting Tools for Business Decision Making
ISBN: 978-1119368458
7th Canadian edition
Authors: Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso, Barbara Trenholm, Wayne Irvine