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Machine Corp. has several pending lawsuits against its company. Review each situation and (1) determine the treatment for each situation as probable and estimable, probable and inestimable, reasonably possible, or remote; (2) determine what, if any, recognition or note disclosure is required; and (3) prepare any journal entries required to recognize a contingent liability. A. A pending lawsuit, claiming $100,000 in damages, is considered likely to favor the plaintiff and can be reasonably estimated. B. Machine Corp. believes there might be other potential lawsuits about this faulty machinery, but this is unlikely to occur. C. A claimant sues Machine Corp. for damages, from a dishonored service contract agreement; the plaintiff will likely win the case but damages cannot be reasonably estimated. D. Machine Corp. believes a customer will win a lawsuit it filed, but the outcome is not likely and is not remote. It is possible the customer will win.

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Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685

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Section
FindFindarrow_forward

Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
Chapter 12, Problem 6PA
Textbook Problem
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Machine Corp. has several pending lawsuits against its company. Review each situation and (1) determine the treatment for each situation as probable and estimable, probable and inestimable, reasonably possible, or remote; (2) determine what, if any, recognition or note disclosure is required; and (3) prepare any journal entries required to recognize a contingent liability.

A. A pending lawsuit, claiming $100,000 in damages, is considered likely to favor the plaintiff and can be reasonably estimated.

B. Machine Corp. believes there might be other potential lawsuits about this faulty machinery, but this is unlikely to occur.

C. A claimant sues Machine Corp. for damages, from a dishonored service contract agreement; the plaintiff will likely win the case but damages cannot be reasonably estimated.

D. Machine Corp. believes a customer will win a lawsuit it filed, but the outcome is not likely and is not remote. It is possible the customer will win.

To determine

(a)

Introduction:

A contingent liability is an outcome of an unknown or uncertain situation occurs and produces a future debt for the company.

To identify:

The contingent liability.

Explanation of Solution

Identification of contingent liability:

Situation Type of contingent liability
A pending lawsuit of $100,000 is likely to be in favour to the plaintiff and reasonably estimated. Probable and estimable
There might be other lawsuit because of faulty machinery and unlikely to incur...
To determine

(b)

To identify:

The reorganization in the financial statement or note is required.

To determine

(c)

To journalize:

The transactions relating to the contingent liability.

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Chapter 12 Solutions

Principles of Accounting Volume 1
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