Question

Carson Company faces a probable loss on a pending lawsuit where the amount of the loss is estimated to be $500,000. The journal entry to recognize the potential loss is:
Debit Prepaid Legal Expense $500,000; credit Contingent Legal Liability $500,000.


Debit Legal Expense $500,000; credit Lawsuit Payable $500,000.


Debit Contingent Legal Expense $500,000; credit Contingent Legal Liability $500,000.


Debit Lawsuit Payable $500,000; credit Contingent Legal Liability $500,000.


No journal entry is required.

Answer 1

Answer:

Debit Contingent Legal Expense $500,000; credit Contingent Legal Liability $500,000.

Explanation:

The Journal entry with their narration and explanation is shown below:-

When the contingent liability loss is probable and the liability can be recorded, the law suits loss in probability and the cost can be calculated, therefore the following entry for the potential loss is passed

Contingent legal expense Dr,$500,000

       To Contingent legal liability $500,000

(Being potential loss is recorded)