Question

Buchanan Company recently was sued by a competitor for patent infringement. Attorneys have determined that it is probable that Buchanan will lose the case and that a reasonable estimate of damages to be paid by Buchanan is $305,090. In light of this case, Buchanan is considering establishing a $112,720 self-insurance allowance.
What entry, if any, should Buchanan record to recognize this loss contingency? (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.)


Account Titles and Explanation


Debit


Credit

Answer 1

Answer:

Dr Lawsuit Expense 305,090

Cr Lawsuit Liability 305,090

Dr Lawsuit Loss 112,720

Cr Lawsuit Liability 112,720

Explanation:

Preparation of Journal entries

Based on the information given we were told that Buchanan had to paid the amount of $305,090 for damages which means that the Journal entry will be:

Dr Lawsuit Expense 305,090

Cr Lawsuit Liability 305,090

Based on the information given we were told that he was considering to establish the amount of $112,720 as a self insurance allowance which means that the Journal entry will be:

Dr Lawsuit Loss 112,720

Cr Lawsuit Liability 112,720