During the current year, P & P Products was involved in two lawsuits. In the fir

Question

During the current year, P & P Products was involved in two lawsuits. In the first lawsuit, P & P Products was sued for manufacturing potentially defective containers that came apart during loading and injured two workers. The company’s attorney has determined that there is a high probability that the jury will grant punitive damages of $1,000,000 to the plantiff. For the second lawsuit, P & P Products is suing a vendor for failing to comply with design specifications, which caused the injuries outlined in the lawsuit against P & P Products. P & P Products is suing the vendor for $2,500,000 to cover payment for the first lawsuit and damages to the company’s reputation. The company’s attorney is confident that P & P Products will be successful.

Required: A. How should P&P account for the first lawsuit? B. How should P&P account for the second lawsuit?

Explanation / Answer

For the first contingency, the journal entry would be

Product Damages A/c DR      $ 1,000,000

To Contingent Liability for Lawsuit A/c $ 1,000,000

For the second contingency, the journal entry would be

Contingent Liability for Lawsuit A/c DR $ 2,500,000

To Vendor Dispute A/c $ 2,500,000

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