I have to journalize the following entry for Sir-Rents-A-Lot:
Sept 29, 2009 A child was slightly injured when he fell off of the front-end loader
that was rented to Landscrapers Inc. The child is the only son of a
lawyer and an orthopedic surgeon. They have filed a lawsuit at
$250,000 against both Landscrapers and Sir-Rents-A-Lot. The
actual liability for the accident has not yet been determined.
Should I post that entry on Sept. if I don't even know the actual liability? if yes, how?
In this case, since the actual liability for the accident has not yet been determined, you can still journalize the entry on September 29, 2009. However, you need to record it in a way that reflects the uncertainty of the liability. Here's how you can do it:
1. Identify the accounts involved: In this entry, two primary accounts are affected - Accounts Receivable (for the lawsuit amount) and an account related to potential liability, such as a liability or contingency account.
2. Determine the amounts: Even though the actual liability is unknown, you can still include the amount claimed in the lawsuit, which is $250,000. This amount represents the potential liability for Sir-Rents-A-Lot.
3. Journalize the entry: You must make it clear that the liability is uncertain and subject to change. Here's an example of how you can structure the journal entry:
Date: September 29, 2009
Description: Record potential liability for lawsuit filed against Sir-Rents-A-Lot
Debit: Contingent Liability Account ($250,000) - This account represents the potential liability.
Credit: Accounts Receivable ($250,000) - This account represents the amount claimed in the lawsuit.
By following this approach, you are capturing the event in the appropriate accounting period while still indicating the uncertainty surrounding the liability. As the liability becomes determined in the future, you can adjust the journal entry accordingly.