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How are the journal entries and legal entries recorded for contingent liabilities?
There is a lawsuit between company A and company B. Company A sued company B in violating patent rights of technology. Company A claimed $ 3 billion, when the lawsuit began in 2010 but in the final verdict in 2016, company A won $ 400 million. (Company B estimated contingent liability as $800 million in their books)
Solution
Prepare journal entry for year end 2010 as shown below −
| Particulars | Debt (million $) | Credit (million $) |
|---|---|---|
| Lawsuit loss A/c To Lawsuit liability | 800 | 800 |
| Being estimated amount of lawsuit losses recorded | ||
Probability of occurrence
- If the liability is not probable and will arise soon (journal entry is not passed)
- Disclosure is made in footnotes of financial statements (if occurrence is in later years).
Lost lawsuit payment
The details about the lost lawsuit payment are listed below −
| Particulars | Debt (million $) | Credit (million $) |
|---|---|---|
| Lawsuit loss A/c To cash | 400 | 400 |
| Being Actual amount of lawsuit losses paid | ||
Ledger recordings
The ledger recordings as per the above mentioned data are as follows −
| Date | Particulars | Amount(million $) | Particulars | Amount(million $) |
|---|---|---|---|---|
| DD/MM/2010 | To Bal c/d | 800 | By Bal b/d | |
| By Lawsuit loss A/c (Additional accruals ) | 800 | |||
| Total | 800 | Total | 800 | |
| DD/MM/2016 | To cash A/c (payment against lawsuit) | 400 | By bal b/d | 800 |
| To Bal c/d | 400 | |||
| Total | 800 | Total | 800 |
Updated on: 08-Jul-2021
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