Question

On December 4, 2016, Dan Johnson, the delivery truck driver for Farmers Products Inc., ran a stop sign and collided with another vehicle. On January 8, 2017, the driver of the other vehicle filed suit against Farmers Products for damages to the vehicle. Estimated damages to this vehicle were between $6,000 and $10,000 with no amount within the range more likely than any other amount. Farmers Products issued its 2016 financial statements on March 3, 2017. 1. Prepare the disclosures and/or journal entries Farmers Products should make in preparing it\\'s December 31, 2016, financial statements. 2. If Farmers Products used IFRS, how would the disclosures and/or journal entries differ from those under U.S. GAAP? I tried the following: (using both 6,000 & 10,000) it says its wrong: (image below and textbook image) which is why I am confused.

Answer 1

1.

Under US GAAP the journal entry to be prepared by Famers Products is as follows:  

 

Accout Titles and Explanation	Debit	Credit
Loss from Litigation	$6,000
Estimated Liability from Lawsuit		$6,000

 

2.

Under IFRS the journal entry to be prepared by Famers Products is as follows:   

        

Account Titles and Explanation	Debit	Credit
Loss from Litigation [($6,000 + $10,000) / 2]	$8000
Estimated Liability from Lawsuit		$8000