Ayayai Company recently was sued by a competitor for patent infringement. Attorn

Question

Ayayai Company recently was sued by a competitor for patent infringement. Attorneys have determined that it is probable that Ayayai will lose the case and that a reasonable estimate of damages to be paid by Ayayai is $288,700. In light of this case, Ayayai is considering establishing a $92,500 self-insurance allowance.

What entry, if any, should Ayayai record to recognize this loss contingency? (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Account Titles and Explanation

Debit

Credit

Account Titles and Explanation

Debit

Credit

Explanation / Answer

Account Title and Explaination Debit Credit Litigation Expense $ 2,88,700 Litigation Liability $ 2,88,700 (Being Contingent Liability recognised) Expalination: Ayayai company should record a litigation accrual on the patent case, since the amount is both estimated and probable. This entry will reduce income by $2,88,700 and Ayayai company will report a litigation liability of $2,88,700. The $92,500, self - Insurance allowance will have no impact on income and liabilities.

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