Question

10A-4. SLIPPERYFEET SHOE Company has been sued by a customer who fell down while wearing a pair of the company's product at the local ice rink. The lawsuit asks for $3,000,000 in unspecified damages. Required: show the appropriate journal entry and describe any footnote under the following three conditions. 1. SLIPPERYFEET's attorney thinks that the possibility of losing this case is remote since the customer was well-known to be accident prone. 2. SLIPPERYFEET's attorney thinks that it is reasonably possible that the company will have to pay something to settle the case and that this is a good idea since it will eliminate the negative publicity. 3. SLIPPERYFEET's attorney thinks it is likely that the company will have to pay between $250,000 and $800,000 as a result of the case.

Answer 1

1. No entry is required since the possibility of losing the case is remote and hence liability is not recognized. The same need not be shown in the footnotes since there is no contingent liability

2. No entry is required since there is possibility but the economic outflow cannot be measured with certainty. A disclosure that the company will incur damages but the economic outflow cannot be measured with reliable estimates has to be disclosed in the financial statements.

3. The lower range should be used to record contingent liability as per US GAAP in case there is a range given.

Journal entry:

Account tiles	Debit	Credit
Lawsuit damages expenses	250000
Estimated Recorded liabilities		250000