Question

Harrington Company was sued by an employee in late 2017. General counsel concluded that there was an 85 percent probability that the company would lose the lawsuit. The range of possible loss is estimated to be $18,000 to $61,000, with no amount in the range more likely than any other. The lawsuit was settled in 2018, with Harrington making a payment of $58,000.

Assume that a U.S.–based company is issuing securities to foreign investors who require financial statements prepared in accordance with IFRS. Thus, adjustments to convert from U.S. GAAP to IFRS must be made. Ignore income taxes.

Required:

1. Prepare journal entries for this lawsuit for the years ending December 31, 2017, and December 31, 2018, under (1) U.S. GAAP and (2) IFRS.

2. Prepare the entry(ies) that Harrington would make on the December 31, 2017, and December 31, 2018, conversion worksheets to convert U.S. GAAP balances to IFRS.

Answer 1

Answer:

Journal entries for the lawsuit for the year ending december 31 2017 and december 31 2018

1. Under US GAAP

Date	Particulars	Debit ($)	Credit ($)
31/12/2017	Loss on law suit - estimated account	18000
	Estimated liability for law suit		18000
	(To record estimated liability provided for lawsuit)
31/12/2018	Estimated liability for lawsuit account	18000
	Additional loss on law suit (18000-58000)	40000
	Cash		58000
	(To record cash paid on settlement)

Under IFRS

Date	Particulars	Debit ($)	Credit ($)
31/12/2017	Loss on law suit - estimated account	39500
	Estimated liability for law suit (18000+61000)/2		39500
	(To record estimated liability provided for lawsuit)
31/12/2018	Estimated liability for lawsuit account	39500
	Additional loss on law suit	18500
	Cash		58000
	(To record cash paid on settlement)

Under US GAAP if there is a range of possible losses but loss cannot be estimated with in the range the entity will record the low end of the range

Under IFRS if loss cannot be estimated with in the range the entry bwiuull record the mid point of range.

Journal entries for conversion from US GAAP to IFRS

Date	Particulars	Debit ($)	Credit ($)
31/12/2017`	loss on law suit - estimated	21500
	Estimated liability for lawsuit (40000-18500)		21500
31/12/2018	Estimated liability for lawsuit	21500
	Additional liability for lawsuit		21500