Panama Shirt Designs is a defendant in litigation involving an employee accident in its manufacturing plant. For each of the following scenarios, determine the appropriate way to report the situation. Explain your reasoning and record any necessary entry.1.The likelihood of a loss occurring is probable and the estimated loss is $650,000.2.The likelihood of a loss occurring is probable and the loss is estimated to be in the range of $500,000 to $800,000.3.The likelihood of a loss occurring is reasonably possible and the estimated loss is $650,000.4.The likelihood of a loss occurring is remote, while the estimated potential loss is $650,000.
What will be an ideal response?
1. The contingent liability is probable and reasonably estimable, so it must be recorded as follows:
| Loss | 650,000 | ? |
| Contingent Liability | ? | 650,000 |
2. Panama Shirt Designs should record a loss and a liability for the minimum amount ($500,000) and disclose the range between $500,000 and $800,000 in the notes to the financial statements. The journal entry is as follows:
| Loss | 500,000 | ? |
| Contingent Liability | ? | 500,000 |
3. If the likelihood of loss is reasonably possible rather than probable, we record no entry, but make full disclosure in a note to the financial statements to describe the contingency.
4. If the likelihood of loss is remote, disclosure is usually not required.
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