Mipso Co$.$ issued its $20$X$1$ calendar year$-$end financial statements on March $7,20$X$2.$ On January $30,20$X$2,$ the company settled a lawsuit for $$1,600,000.$ At year$-$end, the company had accrued a contingent loss of $$2,000,000.$ How should Mipso account for this event?

No adjustment is needed in $20$X$1$ but the settlement should be disclosed in the notes to the financial statements.

$1$

No adjustment or disclosure is necessary for the $20$X$1$ financial statements because the event occurred in $20$X$2.$

The $20$X$1$ accrual should be decreased by the $$400,000$ difference between the estimated contingency and the actual amount.

No adjustment to the $20$X$1$ financial statements is needed because the difference between the estimate and the actual amount is not material.