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

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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
DD/MM/2010	To Bal c/d	800	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
DD/MM/2016	To Bal c/d	400	By bal b/d	800
	Total	800	Total	800