Below are several accounting situations handled by Lucy, an accounting clerk for ABC Company.

ABC Company follows ASPE.

1. Contingent Loss Due To Lawsuit............................................................. 5,000,000

Contingent Liability Due To Lawsuit............................................................... 5,000,000

To setup a liability as we are being sued due to a defective product for $ 5,000,000. Our lawyers say it is unlikely that we will have to pay out this amount and the lawsuit will most likely be dismissed. I have recorded the amount based on the best reasonable estimate. If we did lose the lawsuit, it will have a substantial negative effect on the company's financial position.

2. No entry and no note disclosure.

ABC Company is being sued due to a workplace accident. The company's lawyer says that it is likely that we will lose the lawsuit and estimated that we will have to pay $2,000,000.

3. No entry and no note disclosure.

The company may suffer substantial financial losses due to the possibility of employees going on strike.

4. Contingent Loss Due To Lawsuit............................................................. 3,000,000

Contingent Liability Due To Lawsuit............................................................... 3,000,000

To set up a liability as the company is being sued for wrongful dismissal by an employee. The company's lawyer says that it is probable that we will lose the lawsuit and estimated that we will have to pay $3,000,000.

Instructions:

For each of the above situations, determine if the accounting clerk correctly handled the situation. If you agree that what was done was correct, state so. If not, provide the correct journal entry, state that only a note disclosure is required, or state that neither are required. (2 marks each situation)