reat Adventures is a defendant in litigation involving a biking accident during
ID: 2474468 • Letter: R
Question
reat Adventures is a defendant in litigation involving a biking accident during one of its adventure races. The front tire on one of the bikes came off during the race, resulting in serious injury to the rider. However, Great Adventures can document that each bike was carefully inspected prior to the race. It may have been that the rider loosened the wheel during the race and then forgot to tighten the quick-release mechanism.
For each of the following scenarios, record the necessary entry.
17.
value:
2.50 points
Required information
The likelihood of a payment occurring is probable, and the estimated amount is $125,000. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
The likelihood of a payment occurring is probable, and the amount is estimated to be in the range of $105,000 to $155,000. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
The likelihood of a payment occurring is reasonably possible, and the estimated amount is $125,000. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
The likelihood of a payment occurring is remote, while the estimated potential amount is $125,000. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
reat Adventures is a defendant in litigation involving a biking accident during one of its adventure races. The front tire on one of the bikes came off during the race, resulting in serious injury to the rider. However, Great Adventures can document that each bike was carefully inspected prior to the race. It may have been that the rider loosened the wheel during the race and then forgot to tighten the quick-release mechanism.
Explanation / Answer
The question here is involving contingent liability.
A Contingent Liability is a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise. It can also be a present obligation that arises from past events but is not recognised because (i) It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or (ii) A reliable estimate of the amount of the obligation cannot be made.
Case-1
Here, the loss is probable and the amount of loss can be estimated. Hence the entity needs to provide for the same. The journal entry will be as follows:
Case-2
Here also, the likelihood of a payment occurring is probable but the amount of loss can be estimated only within a range. Hence the entity can account for the loss and liability for the minimum amount and disclose the fact in the notes to the financial statements. The journal entry will be as follows:
Case-3
Here, the likelihood of a payment occurring is reasonabily possible, rather than probable. Hence the entity need not make any entry in the books of accounts, but full disclosure of the fact in the notes to the financial statements is necessary.
Case-4
Here, the likelihood of a payment occurring is remote. Hence the entity need not make any entry in the books of accounts. Usually disclosure is also not required. But, if the probable loss is material to the entity, or, if there are any statutory requirements for disclosing the same, the facts need to be mentioned in the notes to the financial statements.
Date General Ledger Debit ($) Credit ($) Loss due to accident 125,000 To Contingent Liability (or Provision for Loss) 125,000Related Questions
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