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CONTINUING PROBLEM: FRONT ROW ENTERTAINMENT
Front Row has the following selected balances at the February 28, 2020:
The following information is not reflected in these balances:
a. On February 28, 2020, Front Row accepted delivery of $5,325 of live-performance DVDs from the supplier. Front Row has not yet paid the supplier.
b. On February 1, Front Row purchased $8,000 of equipment for its Chicago Music House venue by issuing a 1-year note payable bearing 10% interest. Front Row has not made any journal entries related to this transaction and should accrue for this at month’s end. ( Note: Round any calculations to the nearest dollar.)
c. Front Row collected $3,745 of advance ticket sales related to an upcoming concert. This price included 7% state sales tax.
d. Amanda Wilson was paid $2,000 in wages to update and monitor the online fan communities. Federal and state unemployment taxes are $16 and $108, respectively. All of Amanda’s wages are subject to Social Security and Medicare at the normal rates. In addition, $375 of federal income taxes were withheld. ( Note: Round any calculations to the nearest dollar.)
In addition, several individuals were injured during a concert in February when they pushed past security and rushed the stage. A personal injury lawsuit was filed against Front Row in the amount of $250,000. After investigating the incident and consultation with legal counsel, it was determined that the likelihood of a judgment against Front Row is remote.
Required:
How should this contingent event be recorded?
Introduction:
A liability whose time and amount is dependent on a future event is referred to as a contingent liability.
To explain:
Recording of contingent liability.
A contingent liability is recorded when:
- The future event on which it is dependent is probable.
- The amount of contingency can be estimated.
If the future event is not probable or the estimate of contingency cannot be derived then it is not recorded as a contingent liability in the financial statements and can be recorded in the footnotes.
In case of lawsuit, if the judgment of the case is not probable then the company won’t show it is a contingency in balance sheet nor in the footnotes...
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