Question

BJN, Inc. enlists the services of outside counsel to assist in a pending litigation matter. Facts of the case indicate BJN may indeed have loss exposure to CMN, Inc. for infringement. Under such case, BJN Inc. could end up paying $10,000,000 when it settles. It is highly probable BJN will lose.

• Record the appropriate journal entry, if required, for BJN prior to any actual award of damages.

• Record the journal entry if the case settled for $8,500,000

Note: Make sure to format your entries properly, whether you are using a table or plain text entry.

Answer 1

A contingent liability is recorded in the books of accounts if the probability of it
being incurred is high and the amount payable under the said contingent
liability can be reasonably quantified.
If the above two conditions are not satisfied then the contingent liability is not
recorded in the books of accounts but is shown in the financial statements as
disclosure.
In the given problem,the two conditions for recording contingent liability are
satisfied as BJN estimates that there is a high probability that it will lose in the
lawsuit and the loss exposure is reasonably estimated at $ 10,000,000.Hence,
the contingent liability will be recorded in the books of accounts.
Journal entries in the books of BJN
Account Title and Explanation	Debit	Credit
Law Suit Loss account	$10,000,000
Law Suit Liability account		$10,000,000
(being the contingent liability against the loss exposure on law suit for
infringement against the company filed by CMN Inc.,)
Law Suit Liability account	$8,500,000
Cash		$8,500,000
(being final liability on settlement of the law suit files by CMN Inc.,)
Law Suit Liability account	$1,500,000
Law Suit Loss account		$1,500,000
(being excess amount of liability recorded earlier now reversed and closed
after the settlement of the infringement lawsuit filed by CMN Inc.,)