Question

Great Adventures is a defendant in litigation involving a biking accident during one of its adventure races. The front tire on one of the bikes came off during the race, resulting in serious injury to the rider. However, Great Adventures can document that each bike was carefully inspected prior to the race. It may have been that the rider loosened the wheel during the race and then forgot to tighten the quick-release mechanism.

For each of the following scenarios, record the necessary entry. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Required:

1. The likelihood of a payment occurring is probable, and the estimated amount is $129,000.

2. The likelihood of a payment occurring is probable, and the amount is estimated to be in the range of $109,000 to $159,000.

3. The likelihood of a payment occurring is reasonably possible, and the estimated amount is $129,000.

4. The likelihood of a payment occurring is remote, while the estimated potential amount is $129,000.

Answer 1

Requirement 1 The loss is probable and reasonable estimate so entry is Debit Credit Loss a/c Contingent Liability Record loss contingency) 129,000 (129,000) Requirement 2 It would record loss and liability for the minimim amount and also disclose the range b/w 1,09,000 to 1,59,000 in notes to financial statements Entry is Debit Credit Loss a/c Contingent Liability (Record loss contingency) 109,000 (109,000) Requirement 3 If likelyhood of loss is reasonably possible rather than probable we record no entry but make full disclosure in footnotes to Financial statements to describe contingency. Requirement 4 If likelyhood of loss is remote, disclosure is not required