Canseco Company is preparing the annual financial statements at December 31,1992

Question

Canseco Company is preparing the annual financial statements at December 31,1992. During 1992, a customer fell while riding on the escalator and has filed a lawsuit for $40,000 because of a claimed back injury. The lawyer employed by the company has carefully assessed all of the implications. If the suit is lost, the lawyer's reasonable estimate is that the $40,000 will be assessed by the court. How should the contingency be handled during 1992 in each of the following cases? Give all necessary entries and/or any notes. Assume that the lawyer and the management concluded that it is reasonable possible that the company will be liable, and it is reasonably estimated that the amount will be $40,000. Assume, instead, that the lawyer, the independent accountant, and management have reluctantly concluded that it is probable that the suit will be successful. Assume that the conclusion of the legal counsel and management is that it is remote that there will be a contingency loss. They believe the suit is without merit

Explanation / Answer

1) In this case Provision should be recognised and below entry has to be passed:

Legal claim expense a/c. Debit

To provision for legal claim a/c. Credit

2). In this case contingent liability should be recognised and presented below financial statement.

3) Neither provision nor contingent liability will recognised in this case.

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