Boreal Bikes is being sued by a cyclist injured by a frame failure. Counsel judges it 60 % likely the company will lose and estimates the most likely damages at $150,000. Record the provision at year-end.
Boreal Bikes is being sued by a cyclist injured by a frame failure. Counsel judges it 60 % likely the company will lose and estimates the most likely damages at $150,000. Record the provision at year-end.
Answer
Dr Legal Expense 150000; Cr Provision for Lawsuit 150000
Accounts - Legal Expense - Provision for Lawsuit - Contingent Liability - Cash - Retained Earnings - Accounts Payable Probable (60 % > 50 %) and reliably estimable, so a provision is recognised at the most likely amount: debit the expense, credit a real liability. “Contingent Liability” is never an account — a contingent liability is by definition not recognised. No cash moves until the case settles.
Lyryx IFA Vol 2 §12.5.1; Lyryx Intro FA §9.3; IAS 37 ¶36–40