I need some accounting help on reversing of liab that didn't happen

[schirallicpa]

The Taxpayer - based on what attorney told him about 5 years ago - recorded a liability.  I agreed with it - it was very probable that it would happen.  We estimated that he would have to pay $25000.  Debit expense, credit liability in 2011.   Case was tied up in state of NY for years and when settled my client will get money back, and will not owe as we originally all thought.  So now we think there should be a receivable on the books in the amount of 75000, not a liability.  

So client posted an entry to debit the liability for 25000 to take it off the books, and credits retained earnings - prior period adjustment.  

I don't like messing with retained earnings, partly because of some other HUD reporting we will have to do.  Makes things messy.

So if we are going to record the receivable, can't I debit recievable for 75000, debit liabiltiy 25000, and credit the expense for 100000.  (of course, client is trying to avoid putting that 25000 into this year and just wants to bury in RE.)  

I am wondering if making it a prior period entry even makes sense.  Wouldn't that mean I should amend that old tax return?  Yuk.  

any thoughts?

 

 

 

 

 

[rfassett]

Assuming the client was on the accrual basis of accounting for tax purpose, the income is recognized in the year that the liability is known to be overstated.  No amended return is necessary.  No messing with retained earnings permitted.

[BHoffman]

The client recognized expense in a prior period of $25,000.  To correct that, you would debit the liability and credit the expense that was originally debited in the prior period in this current period.  If that looks clumsy with a negative expense, I suppose you could credit the same income account as the receivable mentioned below, but keep your notes in order.

The client has a $75,000 receivable in the current period.  To record that, you would debit the receivable and credit an income account.

This transaction sounds like a "contingency", so I agree with rfassett.

 

 

[schirallicpa]

i didn't think there should be any prior period adjustment.  So I will have client fix that and we will record properly.  Thanks for the responses.  Sometimes you just get tired of thinking I think...........