Question

Problem 13-10 On November 24, 2017, 26 passengers on Bonita Airlines Flight No. 901 were injured upon landing when the plane skidded off the runway. Personal injury suits for damages totaling $8,644,000 were filed on January 11, 2018, against the airline by 18 injured passengers. The airline carries no insurance. Legal counsel has studied each suit and advised Bonita that it can reasonably expect to pay 50% of the damages darned. The financial statements for the year ended December 31, 2017, were issued February 27, 2018 (a2) Prepare the journal entry required by the airline in preparation of the December 31, 2017, financial statements. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit December 31, 2017

Please explain detail

Answer 1

Solution:
Journal Entry

Date	Particulars	Debit ($)	Credit ($)
Dec 31,2017	Contingency loss - Lawsuit ($8,644,000*50%)	$4,322,000
	Contingency liability - Law suit		$4,322,000
	(To record contingency loss due to law suit)

Notes to the financial statement:
During the year 2017 an accident occurred to Flight No 901 of the company. Eighteen passengers of the flight involved in the accident sued the company for personnel injury damages totaling $8,644,000. The company therefore provided $4,322,000 for estimated contingency losses as suggested by the legal counsel to meet the contingency arising out of final settlement of the suit.
Note:
=> The Obligation event (Lawsuit) has occurred before the date of financial statement and
=> The loss arising out of obligation event can be reasonably estimated.