Question

Pacific Cruise Lines is a defendant in litigation involving a swimming accident on one of its three cruise ships.1. The likelihood of a payment occurring is probable, and the estimated amount is $1.14 million. 2. The likelihood of a payment occurring is probable, and the amount is estimated to be in the range of $0.94 to $1.14 million. 3. The likelihood of a payment occurring is reasonably possible, and the estimated amount is $1.14 million. 4. The likelihood of a payment occurring is remote, while the estimated potential amount is $1.14 million. Record the necessary entry for the scenarios given above.

Answer 1

Answer:

1. The likelihood of a payment occurring is probable, and the estimated amount is $1.14 million.

• Dr Law suit loss 1,140,000
•     Cr Law suit liability 1,140,000

2. The likelihood of a payment occurring is probable, and the amount is estimated to be in the range of $0.94 to $1.14 million.

• Dr Law suit loss 940,000
•     Cr Law suit liability 940,000

US GAAP allows companies to record probable losses at lowest estimated value.

3. The likelihood of a payment occurring is reasonably possible, and the estimated amount is $1.14 million.

• no journal entry is required, only a disclosure in the footnotes of the financial statements.

A contingent liability (or loss) that is only possible, but not probable, does not need to be journalized and recorded. It only needs to be disclosed in the footnotes of the financial statements.

4. The likelihood of a payment occurring is remote, while the estimated potential amount is $1.14 million.

• no journal entry is required

A contingent liability (or loss) that is remote, does not need to be journalized or recorded, nor included in the footnotes of the financial statements.