Alex Rodriguez Inc., a publishing company, is preparing its December 31, 2010, f

Question

Alex Rodriguez Inc., a publishing company, is preparing its December 31, 2010, financial statements and must determine the proper accounting treatment for the following situations.

              A suit for breach of contract seeking damages of $1,000,000 was filed by an author against Rodriguez on July 1, 2010. The company's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the court’s award to the plaintiff is in the range between $300,000 and $700,000. No amount within this range is a better estimate of potential damages than any other amount.

1) Prepare the journal entry that should be recorded as of December 31, 2010.

Explanation / Answer

Until the suit is completed you will not have a number to work off of... so other than legal fees there would be nothing on the statement $0 would be my answer. Until the suit is settled you can not just estimate what the outcome will be.

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