Question
Cindervale Chemicals is preparing its December 31, 2026 financial statements under US GAAP. Legal counsel reports:
- Lawsuit A — a neighbour's property-damage claim. An unfavourable outcome is probable. The loss is estimated at between $200,000 and $500,000, with no amount in the range a better estimate than any other.
- Lawsuit B — a former distributor's contract claim for $90,000. An unfavourable outcome is reasonably possible but not probable.
- Counter-claim — Cindervale is suing a supplier for defective equipment and will probably be awarded about $150,000.
On March 18, 2027 Lawsuit A was settled and Cindervale paid $260,000 in cash.
Required: Record every entry required at December 31, 2026 and on March 18, 2027. Use Litigation Loss and Litigation Liability. Record nothing for an item that is only disclosed or not recognized.
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
How to approach this
IAS 1 — accrual basis; double-entry recording
Identify the accounts each transaction touches, decide the direction of each, and confirm total debits equal total credits before moving on. Write the debit line first, then the credit, and date each entry to the period the event belongs to rather than the date cash moved.
Common mistakes
- Recording an entry on the cash date when the transaction was on credit.
- Naming an account inconsistently across entries, so the ledger will not aggregate.
- Leaving an entry unbalanced, or balancing it by forcing a figure into a suspense account.
Further reading10 worked journal entry problems