Question

On 10/21/20Y1, Company A faced a lawsuit that was probable of losing and reasonably estimated that it might need to pay 10M. On 11/29/20Y1, Company A lost the lawsuit and it paid 13M a month later. What are the journal entry on 10/21/20Y1, 11/29/20Y1, and 12/29/20Y1? (Contingent liabilities)

Answer 1

		As on 10/21/20Y1, company was certain that it will have to pay $10 million. Hence it will create a provision on that day
		In order to record a potential or contingent liability in the financial statements, it needs to clear two basic criteria based on the probability of occurrence and its related value as discussed below: The likelihood of occurrence of contingent liability is high (i.e. more than 50%) and Estimation of the value of the contingent liability is possible. Upon clearing these two fundamental criteria, the contingent liabilities will be journalized and recorded as: A loss or expense in the statement of profit and loss. Liability in the balance sheet.
	Date	Account titles and explanations	Debit	Credit
	10/21/20Y1	Law suit loss A/c	$10,000,000
		To, lawsuit liability		$10,000,000
		(being estimated amount of law suit losses recorded)
	11/29/20Y1	Law suit loss A/c	$3,000,000
		To, lawsuit liability		$3,000,000
		(Additional provision made for losses)
	12/29/20Y1	Lawsuit liability	$13,000,000
		To, cash		$13,000,000
		(being lawsuit liability paid)