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 or 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 a. Interest Payable b. Dec 15, Year 2 Cash Check Amount Account Name 10 x Inventory Accounts Payable Salaries Payable To record settlement of lawsuit. v V v Dr. 0 0 0 0 Cr. 0x 0x 0x 0x

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Contingent Liabilities and Provisions

A contingent liability can be defined as a liability the occurrence of which is dependent upon the happening of an uncertain future event. It is generally recorded in the books only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly.