Question

Scorcese Inc. is involved in a lawsuit at December 31, 2017. (a) Prepare the December 31 entry assuming it is probable that Scorcese will be liable for $900,000 as a result of this suit. (b) Prepare the December 31 entry, if any, assuming it is not probable that Scorcese will be liable for any payment as a result of this suit.

Short answer

Lawsuit Loss $900,000

Lawsuit Liability $900,000

No entry

Step-by-step solution

Step 1:

The above question involves the fact that Scorcese has a pending lawsuit that can have an outcome that may cause an outflow to the tune of $900,000. This is a Contingent Liability. A contingent liability is a liability that may arise or not arise depending upon the happening or non-happening of a future uncertain event. In the given case, the liability depends upon the outcome of the suit, which is right now uncertain.

Step 2:

Transactions	General Journal	Debit	Credit
(a)	Lawsuit Loss	$900,000
	Lawsuit Liability		$900,000
	(Being probable lawsuit recorded)
(b)	No entry	-----------	------------

Explanations

1. Lawsuit Loss = $900,000 (Given)
2. No entry = There is no entry required, the loss is not accrued because it is not probable that a liability has been incurred at 12/31/12.