Carson Company faces a probable loss on a pending lawsuit where the amount of the loss is estimated to be $500,000.The journal entry to recognize the potential loss is:
A)Debit Prepaid Legal Expense $500,000;credit Contingent Legal Liability $500,000.
B)Debit Legal Expense $500,000;credit Lawsuit Payable $500,000.
C)Debit Contingent Legal Expense $500,000,credit Contingent Legal Liability $500,000.
D)Debit Lawsuit Payable $500,000,credit Contingent Legal Liability $500,000.
E)No journal entry is required.

Question

Quizplus · Accepted Answer

When a company faces a probable loss on a pending lawsuit, the company should record a contingent liability. A contingent liability is a potential obligation that may or may not occur in the future. The journal entry to record a contingent liability is to debit the Contingent Legal Expense account and credit the Contingent Legal Liability account.

Carson Company Faces a Probable Loss on a Pending Lawsuit