10. (TCO D) Tender Foot, Inc. is involved in litigation regarding a faulty produ

Question

10. (TCO D) Tender Foot, Inc. is involved in litigation regarding a faulty product sold in a prior year. The company has consulted with its attorney and determined that it is possible that it may lose the case. The attorneys estimated that there is a 40% chance of losing. Tender Foot’s attorney estimated that if it loses, then the amount of any payment would be $500,000. What is the required journal entry as a result of this litigation? (Points : 5) Debit Litigation Expense for $500,000 and credit Litigation Liability for $500,000. No journal entry is required. Debit Litigation Expense for $200,000 and credit Litigation Liability for $200,000. Debit Litigation Expense for $300,000 and credit Litigation Liability for $300,000

Explanation / Answer

NO JOURNAL ENTRY IS REQUIRED BECAUSE THE PROBABILITY IS LESS THAN 50%. HENCE INSTEAD OF MAKING A JOURNAL ENTRY IT HAS TO BE SHOWN AS CONTINGENT LIABILITY IN THE FOOT NOTES.

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