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Chapter 13: Q11BE (page 692)

BE13-11 (L03) Buchanan Company recently was sued by a competitor for patent infringement. Attorneys have determined that it is probable that Buchanan will lose the case and that a reasonable estimate of damage to be paid by Buchanan is \(300,000. In light of this case, Buchanan is considering establishing a \)100,000 self-insurance allowance. What entry(ies), if any, should Buchanan record to recognize this loss contingency?

Short Answer

Expert verified

The amount of loss on contingency is$300,000.

Step by step solution

01

Meaning of Loss contingency

Loss contingency means a reduction in the value of an asset or an increase in liability based on the outcome of a future event. For example, loss contingency includes obligations related to product warranties and defects, guarantees of indebtedness of others, etc.

02

Journal Entry

Transaction

Accounts and Explanations

Debit

Credit

1

Litigation Expenses

$300,000

Litigation Liability

$300,000

(To record loss contingency)

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