How are the journal entries and legal entries recorded for contingent liabilities?

Banking & FinanceFinance ManagementGrowth & Empowerment

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 −

ParticularsDebt (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 −

ParticularsDebt (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 −

DateParticularsAmount(million $)ParticularsAmount(million $)
DD/MM/2010To Bal c/d800By Bal b/d
By Lawsuit loss A/c (Additional accruals )800

Total800Total800
DD/MM/2016To cash A/c (payment against lawsuit)400By bal b/d800
To Bal c/d400

Total800Total800


raja
Published on 08-Jul-2021 12:34:04
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