Question

Pacific Cruise Lines is a defendant in litigation involving a swimming accident on one of its three cruise ships. Required: 1. The likelihood of a payment occurring is probable, and the estimated amount is $1.21 million. 2. The likelihood of a payment occurring is probable, and the amount is estimated to be in the range of $1.01 to $1.21 million. 3. The likelihood of a payment occurring is reasonably possible, and the estimated amount is $1.21 million. 4. The likelihood of a payment occurring is remote, while the estimated potential amount is $1.21 million. Record the necessary entry for the scenarios given above. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in dollars, not in millions. (i.e. 5.5 should be entered as 5,500,000).)

Answer 1

Solution 1:

Pacific cruise lines would record a loss and liability of $1,210,000 as likelihood of a payment occuring is probable.

Journal Entries - Pacific Cruise lines
Particulars	Debit	Credit
Loss Dr	$1,210,000.00
To contingent liability		$1,210,000.00
(To record loss contigency)

Solution 2:

Pacific cruise lines would record a loss and a liability for the minimum amount $1,010,000 and disclose the range between $1,010,000 and $1,210,000 in the footnotes to the financial statements.

Journal Entries - Pacific Cruise lines
Particulars	Debit	Credit
Loss Dr	$1,010,000.00
To contingent liability		$1,010,000.00
(To record loss contigency)

Solution 3:

If the likelihood of loss is reasonably possible rather than probable, no entry is required but we make full disclosure in a footnote to the financial statement for contingency.

Solution 4:

If the likelihood of loss is remote, journal entry and disclosure is usually not required.