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

a) In this case, the loss is probable therefore journal entry is required to record the estimated loss which is shown as follows:-

Loss $650,000

Contingent Liability $650,000

(Record the loss contingency)

b) In this case Panama shirt designs would record a loss and a liability for the minimum amount of range (i.e. $600,000) and disclose the range between $600,000 and $900,000 in the footnotes to the financial statements. The journal entry is shown as follows:-

Loss $600,00

Contingent Liability $600,000

(Record the loss contingency)

c) If the likelihood of loss is reasonably possible rather than probable, no journal entry will be recorded but full disclosure should be made in the footnote to the financial statements to describe the contingency.

d) If the likelihood of loss is remote, then disclosure is also not required.