Question

The Commonwealth of Virginia filed suit in October 2016, against Northern Timber Corporation seeking civil penalties and injunctive relief for violations of environmental laws regulating forest conservation. When the financial statements were issued in 2017, Northern had not reached a settlement with state authorities, but legal counsel advised Northern Timber that it was probable the ultimate settlement would be $1,050,000 in penalties. The following entry was recorded:

Loss—litigation	1,050,000
Liability—litigation		1,050,000

   
Late in 2018, a settlement was reached with state authorities to pay a total of $640,000 to cover the cost of violations.

Required:
1. Prepare any journal entries related to the change. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Journal entry:

Account title	debit	credit
Liability - litigation Gain - litigation ($1050000 - $640000)	$410000 .	. $410000

the above journal entry is recorded to change the liability based upon new estimates.