Scorcese Inc. is involved in a lawsuit at December 31, 2020. (a) Prepare the December 31 entry assuming it is probable that Scorcese will be liable for $900,000 as a result of this suit.
(b) Prepare the December 31 entry, if any, assuming it is not probable that Scorcese will be liable for any payment as a result of this suit.

Answer and Explanation:

a. The Journal entry is shown below:-

Lawsuit loss Dr, $900,000

         To Lawsuit liability $900,000

(Being lawsuit loss is recorded)

Here we debited the lawsuit loss as it increased the losses and we credited the lawsuit liability as  it also increased the liabilities because the losses contains normal debit balance and the liability contains normal credit balance

b. No Journal entry is required as The loss is not accrued as it is not expected that a liability has been spent at Dec 31, 2020

answer; capital structure decision;