Question

The ink-jet printing division of Environmental Printing has grown tremendously in recent years. Assume the following transactions related to the ink-jet division occur during the year ended December 31, 2021.
  

1. Environmental Printing is being sued for $10.1 million by Addamax. Plaintiff alleges that the defendants formed an unlawful joint venture and drove it out of business. The case is expected to go to trial later this year. The likelihood of payment is reasonably possible.

2. Environmental Printing is the plaintiff in an $8.1 million lawsuit filed against a competitor in the high-end color-printer market. Environmental Printing expects to win the case and be awarded between $5.6 and $8.1 million.

3. Environmental Printing recently became aware of a design flaw in one of its ink-jet printers. A product recall appears probable. Such an action would likely cost the company between $410,000 and $810,000.

  
Required:
Record any amounts as a result of each of these contingencies. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field. Enter your answers in dollars, not millions. For example, $5.5 million should be entered as 5,500,000.)

Journal entry worksheet

• Record the contingent liability if needed.

Note: Enter debits before credits.

	Transaction General Journal Debit Credit 1

Journal entry worksheet

• Record the contingent gain if needed.

Note: Enter debits before credits.

	Transaction General Journal Debit Credit 2

Journal entry worksheet

• Record the contingent liability if needed.

Note: Enter debits before credits.

	Transaction General Journal Debit Credit 3

Answer 1

Environmental Printing Journal Enteries Debit in $ Credit in $ Trans. Particulars No Journal Entry required 1 The likelihood of loss is reasonably possible rather than probable, so 2 no journal entry is recorded. However, full disclosure of the contingent liability is made in a footnote to the financial statements. No Journal Entry required 2 Environmental Printing has a contingent gain that is probable and can be reasonably estimated within a range between $5.6 and $8.1 million. Contingent gains are not recorded until the gain is certain. Though firms do not record contingent gains in the accounts, they sometimes disclose them in notes to the financial statements. Loss a/c 410000 3 Dr. To Contingent Liability 410000 Environmental Printing should record a loss and a liability for the minimum amount $410000 and $900000 in the footnotes to the financial statements