Carson Company faces a probable loss on a pending lawsuit where the amount of the loss is estimated to be $500,000. The journal entry to recognize the potential loss is:
A. Debit Prepaid Legal Expense $500,000; credit Contingent Legal Liability $500,000.
B. Debit Legal Expense $500,000; credit Lawsuit Payable $500,000.
C. No journal entry is required.
D. Debit Contingent Legal Expense $500,000, credit Contingent Legal Liability $500,000.
E. Debit Lawsuit Payable $500,000, credit Contingent Legal Liability $500,000.
Answer: D
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