Finance Questions? Ask a Financial Expert for Answers ASAP
Dear Friend, Hello and welcome..
I believe these are all real life situations.
In the first case the possible settlement amount should be entered as a contingent liability in my opinion. A contingent liability is a potential loss that may occur at some point in the future, once various uncertainties have been resolved. A contingent liability is not yet an actual, confirmed liability.
Record a contingent liability when it is probable that the loss will occur, and you can reasonably estimate the amount of the loss. If you can only estimate a range of possible amounts, then record that amount in the range that appears to be a better estimate than any other amount; Disclose the existence of the contingent liability in the notes accompanying the financial statements if the liability is reasonably possible but not probable, or if the liability is probable, but you cannot estimate the amount
The second instance too is a case of contingent liability.
However, here, the company has arrived at "reasonable amount:. So, here too contingent liability would be recorded in the similar fashion, disclosed in the foot notes and recorded in the following manner.
When liability is contingentLegal Expense / settlement A/C DRTo Accrued Liabilities
When it is actually paid out,
Accrued Liabilities A/c DRTo Cash
Rate this answer POSITIVELY IF you are done with this and if this helps and satisfies you as this is the only way we get compensated for assisting you. You may use "CONTINUE CONVERSATION" to revert with additional queries if you have or if I have missed out on any aspect of your question.
Are you there friend ?