Question

After years of experience, Dilcort Company reasonably estimated that a loss from a pending lawsuit was probable at September 30 of the current year. Dilcort Company estimated that the loss would amount to $57,500. Required: Prepare the journal entry, if any, to record the lawsuit at its September 30 year-end.

Answer 1

Answer:

Dr lawsuit expense   $57,500

Cr other liabilities                         $57,500

Explanation:

Since it has been established that the lawsuit would be cost $57,500 based on past experience,it is required that a contingent liability be recognized in the books of accounts to reflect the possible obligation that may arise from the lawsuit by debiting lawsuit damages account with the expense and a corresponding liability account to record the likely obligation as shown below.

The lawsuit expense/damages would be debited since an increase in expense account is naturally a debit entry while other liability account is credited.