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Pacific Cruise Lines is a defendant in litigation involving a swimming accident on one of its three cruise ships.

Required:
For each of the following scenarios, determine the appropriate way to report the situation. Explain your reasoning and record any necessary entry.

a. The likelihood of a payment occurring is probable, and the estimated amount is $1.2 million.
b. The likelihood of a payment occurring is probable, and the amount is estimated to be in the range of $1 to $l.5 million.
c. The likelihood of a payment occurring is reasonably possible, and the estimated amount is $1.2 million.
d. The likelihood of a payment occurring is remote, while the estimated potential amount is.$1.2 million.

Sagot :

Parrain

Answer:

A Contingent liability is recorded in the books if the loss is probable and the amount can be estimated.

a. The loss is probable and the amount can be estimated:

DR Loss                                           $1,200,000

CR Contingent Liability                                       $1,200,000

b. Loss is probable and the amount is estimated in a range. Take the lower limit of the range:

DR  Loss                                           $1,000,000

CR Contingent Liability                                            $1,000,000

c. Loss is not probable but rather reasonably possible. Contingent liability is not recorded but disclosed in full in the footnotes.

d. Loss is remote. Do not record in books and Disclosure is not required.

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