Question

LO 12.3Machine 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.

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

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

24. 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.

25. 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.

Answer 1

Situations	Classification	Recognition / Disclosure	Journal Entry / Discoure	Explanation
A pending lawsuit, claiming $100,000 in damages, is considered likely to favor the plaintiff and can be reasonably estimated.	Probable and Estimable	Recognition	Legal Suit Cases A/c Dr. To Provison for Legal Suit A/c	Here, Situation apparently satisfies both the condiiton of Possibility as well as of Probablity and its measurement. Hence 100000 $ shall be charged and provided in the books. Disclosure for the such event shall be made and its nature, extent and its impact there of in Financial Statements.
Machine Corp. believes there might be other potential lawsuits about this faulty machinery, but this is unlikely to occur.	Remote	NO Disclosure	NO - Journal Entry / NO - Disclosure	In this Scenario, chances of obligatin arises from past events still not confirmed, then such situation has nothing to deal with IAS 37. Hence same shall be ignored by categorising under remote
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.	Probable and Inestimable	Disclosure	NO - - Journal Entry / Yes - Disclosure	As here, As per the legal advisory it is probable that the lawsuit will be ordered against the company but amount canno be reasonabl estimatebale , hence disclosure for the same is only required in respect of the such law suit in notes to Accounts head in Financial Statements.
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.	Reasonbaly Possible	Disclosure	NO - Journal Entry / Yes - Disclosure	Here, in this situation the chances of winning is not likely i.e not probable, It only satisfies the condition of Possibility, while probable is not met. Hence disclosure in respect of same is suffice to meet the accounting standards and guidelines.