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Recording and Reporting a Legal Contingency Pitt Company is the defendant in a lawsuit filed by Hoffman in Year 1 disputing the validity of a copyright held by Pitt. At December 31 of Year 1, Pitt determined that Hoffman would probably be successful against Pitt for an estimated amount of $1,280,000. Appropriately, an $1,280,000 loss was accrued by a charge to income of Pitt for the year ended December 31 of Year 1. On December 15 of Year 2, Pitt and Hoffman agreed to a settlement providing for cash payment of $800,000 by Pitt to Hoffman and transfer of Pitt's copyright to Hoffman. The carrying amount of the copyright on Pitt's accounting records was $192,000 at December 15 of Year 2. a. What would be the effect of the settlement of this liability on Pitt's pretax income before income tax in Year 2? b. Record the entry on December 15 of Year 2 for Pitt Company. a. Income Statement Classification b. Dec 15, Year 2 $ Amount Account Name 0 To record settlement of lawsuit. v V V V Dr. 0 0 0 0 Cr. 0 0 0 0

Recording and Reporting a Legal Contingency Pitt Company is the defendant in a lawsuit filed by Hoffman in Year 1 disputing the validity of a copyright held by Pitt. At December 31 of Year 1, Pitt determined that Hoffman would probably be successful against Pitt for an estimated amount of $1,280,000. Appropriately, an $1,280,000 loss was accrued by a charge to income of Pitt for the year ended December 31 of Year 1. On December 15 of Year 2, Pitt and Hoffman agreed to a settlement providing for cash payment of $800,000 by Pitt to Hoffman and transfer of Pitt's copyright to Hoffman. The carrying amount of the copyright on Pitt's accounting records was $192,000 at December 15 of Year 2. a. What would be the effect of the settlement of this liability on Pitt's pretax income before income tax in Year 2? b. Record the entry on December 15 of Year 2 for Pitt Company. a. Income Statement Classification b. Dec 15, Year 2 $ Amount Account Name 0 To record settlement of lawsuit. v V V V Dr. 0 0 0 0 Cr. 0 0 0 0

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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### Recording and Reporting a Legal Contingency Pitt Company is the defendant in a lawsuit filed by Hoffman in Year 1 disputing the validity of a copyright held by Pitt. At December 31 of Year 1, Pitt determined that Hoffman would probably be successful against Pitt for an estimated amount of $1,280,000. Appropriately, an $1,280,000 loss was accrued by a charge to the income of Pitt for the year ended December 31 of Year 1. On December 15 of Year 2, Pitt and Hoffman agreed to a settlement providing for a cash payment of $800,000 by Pitt to Hoffman and the transfer of Pitt’s copyright to Hoffman. The carrying amount of the copyright on Pitt’s accounting records was $192,000 at December 15 of Year 2. **a. What would be the effect of the settlement of this liability on Pitt’s pretax income before income tax in Year 2?** **b. Record the entry on December 15 of Year 2 for Pitt Company.** #### Income Statement Classification | Income Statement Classification | Amount | | --------------------------------| ------ | | a. | $0 | #### Journal Entry for December 15, Year 2 | Account Name | Dr. | Cr. | |--------------|--------|--------| | | 0 | 0 | | | 0 | 0 | | | 0 | 0 | | | 0 | 0 | | To record settlement of lawsuit, | | | >No changes or amounts are listed in the table as provided. ### Explanation of the Settlement’s Effect: By fulfilling the settlement via a cash payment of $800,000 and transferring the copyright (valued at $192,000 in Pitt's books), Pitt effectively settles a liability that was initially estimated at $1,280,000. This implies a decrease in liabilities and an outflow of assets totaling $992,000, which does not impact the pretax income for Year 2 because the financial impact was recognized in Year 1. ### Note: The data might require specific accounting entries, which can generally include debiting the liability account and crediting the cash and asset accounts involved in the transaction. However, since no specific accounts or amounts are indicated in the provided chart, the exact accounting entries are not detailed here.
Transcribed Image Text:### Recording and Reporting a Legal Contingency Pitt Company is the defendant in a lawsuit filed by Hoffman in Year 1 disputing the validity of a copyright held by Pitt. At December 31 of Year 1, Pitt determined that Hoffman would probably be successful against Pitt for an estimated amount of $1,280,000. Appropriately, an $1,280,000 loss was accrued by a charge to the income of Pitt for the year ended December 31 of Year 1. On December 15 of Year 2, Pitt and Hoffman agreed to a settlement providing for a cash payment of $800,000 by Pitt to Hoffman and the transfer of Pitt’s copyright to Hoffman. The carrying amount of the copyright on Pitt’s accounting records was $192,000 at December 15 of Year 2. **a. What would be the effect of the settlement of this liability on Pitt’s pretax income before income tax in Year 2?** **b. Record the entry on December 15 of Year 2 for Pitt Company.** #### Income Statement Classification | Income Statement Classification | Amount | | --------------------------------| ------ | | a. | $0 | #### Journal Entry for December 15, Year 2 | Account Name | Dr. | Cr. | |--------------|--------|--------| | | 0 | 0 | | | 0 | 0 | | | 0 | 0 | | | 0 | 0 | | To record settlement of lawsuit, | | | >No changes or amounts are listed in the table as provided. ### Explanation of the Settlement’s Effect: By fulfilling the settlement via a cash payment of $800,000 and transferring the copyright (valued at $192,000 in Pitt's books), Pitt effectively settles a liability that was initially estimated at $1,280,000. This implies a decrease in liabilities and an outflow of assets totaling $992,000, which does not impact the pretax income for Year 2 because the financial impact was recognized in Year 1. ### Note: The data might require specific accounting entries, which can generally include debiting the liability account and crediting the cash and asset accounts involved in the transaction. However, since no specific accounts or amounts are indicated in the provided chart, the exact accounting entries are not detailed here.
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