Question

Mississippi Cruise Lines is a defendant in litigation involving a swimming accident on one of its three cruise ships. Required: The likelihood of a payment occurring is probable, and the estimated amount is $1.19 million. The likelihood of a payment occurring is probable, and the amount is estimated to be in the range of $0.99 to $1.19 million. The likelihood of a payment occurring is reasonably possible, and the estimated amount is $1.19 million. The likelihood of a payment occurring is remote, while the estimated potential amount is $1.19 million. Record the necessary entry for the scenarios given above

Answer 1

Different scenarios of litigation-related contingencies lead to varied accounting treatments, such as recording a liability and expense, recording the lower end of a range, note disclosure, or no entry, depending on the likelihood and estimability of the loss.

Step-by-step explanation:

When accounting for contingencies, such as litigation, the criteria for when and how to record a liability vary depending on the likelihood of the event occurring and the ability to estimate the amount. The scenarios presented require different accounting treatments according to the Financial Accounting Standards Board (FASB) guidance.

• If the likelihood of a payment is probable and the amount can be reasonably estimated at $1.19 million, Mississippi Cruise Lines should record a liability and an expense for that amount.
• If the payment is probable and the estimate is a range of $0.99 to $1.19 million, the company should record the lower end of the range ($0.99 million) as a liability and a matching expense.
• When the likelihood of payment is reasonably possible, a note disclosure is typically required, but no entry is recorded.
• If the likelihood of a payment occurring is remote, neither a liability nor a disclosure is normally required.

These entries and disclosures are consistent with the guidance on accounting for contingencies under Generally Accepted Accounting Principles (GAAP).

Answer 2

To record the necessary entry for each scenario, you would need to use the proper accounting entries to reflect the estimated liabilities. In Scenario 2, where the amount is estimated to be in a range, you would record the lower end of the range as the estimated liability. In Scenario 4, since the likelihood of payment is remote, no entry is required.

Step-by-step explanation:

Scenario 1: The likelihood of a payment occurring is probable, and the estimated amount is $1.19 million.

Dr. Estimated Liability 1,190,000
Cr. Estimated Liability 1,190,000

Scenario 2: The likelihood of a payment occurring is probable, and the amount is estimated to be in the range of $0.99 to $1.19 million.

Dr. Estimated Liability 990,000
Cr. Estimated Liability 990,000

Scenario 3: The likelihood of a payment occurring is reasonably possible, and the estimated amount is $1.19 million.

Dr. Possible Liability 1,190,000
Cr. Estimated Liability 1,190,000

Scenario 4: The likelihood of a payment occurring is remote, while the estimated potential amount is $1.19 million.

No entry is required as the likelihood of payment is remote.