Question

Sheridan Shoes Foot Inc. is involved in litigation regarding a faulty product sold in a prior year. The company has consulted with its attorney and determined that it is possible that they may lose the case. The attorneys estimated that there is a 45% chance of losing. If this is the case, their attorney estimated that the amount of any payment would be $794000. What is the required journal entry as a result of this litigation

Answer 1

Answer:

No Journal entry. Disclose contingent liability of  $794000 in Notes to Financial Statements

Explanation:

A Provision is recognized when it is Probable ( Probabity > 50%) that there would be an outflow of economic resources and that a reliable estimate can be made - IAS 37

Since there  is a 45% chance of losing, it is not probable to recognize a provision. Thus a Contingent liability is recognized instead

Contingent Liabilities are only disclosed if the amounts are significant and are not shown on the face of the financial statement (no journal entry)