Question

BE13-10 (L03) 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

Answer:

To record thelawsuit, it requires debiting the lawsuit loss account and crediting the lawsuit liability for the same amount of $900,000.

Step-by-step solution

Meaningof Contingent Liability

The term contingent liability refers to the amount of liability that may or may not become payable in the future. It may or may not become an actual liability. It depends on future events.

Journal entries

Transactions	General Journal	Debit	Credit
(a)	Lawsuit Loss	$900,000
	Lawsuit Liability		$900,000
(b)	No entry required	-----------	------------

Note:

For the second transaction, there is no entry required the loss is not accrued because it is not probable that a liability has been incurred on December 31, 2021.