Question

The Commonwealth of Virginia filed suit in October 2016, against Northern Timber Corporation seeking civil penalties and injunctive relief for violations of environmental laws regulating forest conservation. When the financial statements were issued in 2017, Northern had not reached a settlement with state authorities, but legal counsel advised Northern Timber that it was probable the ultimate settlement would be $1,350,000 in penalties.

The following entry was recorded:
Loss—litigation 1,350,000
Liability—litigation 1,350,000
Late in 2018, a settlement was reached with state authorities to pay a total of $880,000 to cover the cost of violations.
Required:
1. Prepare any journal entries related to the change.

Answer 1

Step-by-step explanation:

The journal entry is shown below:

Litigation - Liability A/c Dr $470,000

To Gain on litigation A/c $470,000

(Being the change is recorded)

The computation is shown below:

= Ultimate settlement amount - pay amount

= $1,350,000 - $880,000

= $470,000

We simply deduct the paid amount from the ultimate settlement amount so that the accurate amount can come.