Question

The ink-jet printing division of Environmental Printing has grown tremendously in recent years. Assume the following transactions related to the ink-jet division occur during the year ended December 31, 2018
1. Environmental Printing is being sued for $10.7 million by Addamax. Plaintiff alleges that the defendants formed an unlawful joint venture and drove it out of business. The case is expected to go to trial later this year. The likelihood of payment is reasonably possible.
2. Environmental Printing is the planiffin an $8.7 million lawsuit filed against a competitor in the high-end color-printer market. Environmental Printing expects to win the case and be awarded between $6.2 and $8.7 million.
3. Environmental Printing recently became aware of a design flaw in one of its ink-jet printers. A product recall appears probable. Such an action would likely cost the company between $470,000 and $870,000.

Answer 1

Answer:

1. No journal entry required

2. No journal entry required

3 Dr Loss $470,000

Cr Contingent liability $470,000

Explanation:

Preparation of the journal entry to Record any amounts as a result of each of these contingencies

1. Based on the information given we were told that The likelihood of the payment is reasonably possible which means that contingent liability amount was not recognized and therefore NO JOURNAL ENTRY IS REQUIRED

No journal entry required

2. Based on the information given we were told that Environmental Printing was expecting to win the case and be awarded the cash amount involved which means NO JOURNAL ENTRY IS REQUIRED reason been the CONTINGENT GAIN will not be recognized until the amount is received.

No journal entry required

3. Contingent liability was recorded because the payment is reasonably possible and Estimated.

Dr Loss $470,000

Cr Contingent liability $470,000