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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

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:

Debit Prepaid Legal Expense $500,000; credit Contingent Legal Liability $500,000.

Debit Legal Expense $500,000; credit Lawsuit Payable $500,000.

Debit Contingent Legal Expense $500,000; credit Contingent Legal Liability $500,000.

Debit Lawsuit Payable $500,000; credit Contingent Legal Liability $500,000.

No journal entry is required.

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