Sandy Shoes Foot Inc. is involved in litigation regarding a faulty product sold in a prior year. The company has consulted with its attorney and determined that it is possible that they may lose the case. The attorneys estimated that there is a 40% chance of losing. If this is the case, their attorney estimated that the amount of any payment would be $500,000. What is the required journal entry as a result of this litigation?

Question

Quizplus · Accepted Answer

Under accounting principles, a liability for a contingent loss from litigation is recorded only if the loss is probable and the amount can be reasonably estimated. In this case, the loss is considered possible (not probable) with a 40% chance, so no journal entry is required.