Question

Panama Shirt Designs is a defendant in litigation involving an employee accident in its manufacturing plant.


For each of the following scenarios, determine the appropriate way to report the situation and record any necessary entry.

- The likelihood of a loss occurring is probable and the estimated loss is $650,000. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.

- The likelihood of a loss occurring is probable and the loss is estimated to be in the range of $600,000 to $900,000. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

- The likelihood of a loss occurring is reasonably possible and the estimated loss is $650,000.

The likelihood of a loss occurring is remote, while the estimated potential loss is $650,000

Answer 1

Answer:

1.Dr Loss 650,000

Cr Contingent Liability 650,000

2.Dr Loss 600,000

Cr Contingent Liability 600,000

3.No Journal Entry Required

4.No Journal Entry Required

Explanation:

Panama Shirt Designs

1.The contingent liability will therefore be tend to be probable and reasonably estimable.

2.Panama Shirt Designs would record a loss as well as a liability for the minimum amount of ($600,000) and in turn disclose the range between the amount of $600,000 and $900,000 in the notes to the financial statements.

3.Hence, if the likelihood of loss is tend to be reasonably possible rather than probable, we would therefore record no Journal entry, but we shall make full disclosure in a note to the financial statements to describe the contingency.

4.lastly if the likelihood of the loss is remote, then disclosure is usually not required.

Journal entry

1.Dr Loss 650,000

Cr Contingent Liability 650,000

2.Dr Loss 600,000

Cr Contingent Liability 600,000

3.No Journal Entry Required

4.No Journal Entry Required