(Learning Objective 1: Reporting a contingent liability) Peterson Security Systems’

revenues for 20X0 totaled €26.2 million. As with most companies, Peterson is a defendant in lawsuits related to its products. Note 14 of the Peterson Annual Report for 20X0 explains the company’s policy on legal proceedings, stating that they will accrue for amounts related to legal matters if liability is probable and if it is reasonable to estimate an amount.

❙ Requirements 1. Suppose Peterson’s lawyers believe that a signifi cant legal judgment against the company is reasonably possible. How should Peterson report this situation in its fi nancial statements?

2. Suppose Peterson’s lawyers believe it is probable that a €2.5 million judgment will be rendered against the company. Report this situation in Peterson’s fi nancial statements.

Journalize any entry required by IFRS. Explanations are not required.