Final answer:
The correct journal entry for an estimated probable loss from a pending patent infringement lawsuit is to debit Estimated Lawsuit Loss and credit Estimated Lawsuit Liability.
Step-by-step explanation:
When a company is involved in a lawsuit concerning patent infringement and the amount of the loss can be estimated with a probable outcome, an accrual should be made in the financial statements. According to accounting principles, the correct journal entry to record the estimated loss from the lawsuit is debit Estimated Lawsuit Loss and credit Estimated Lawsuit Liability. This entry recognizes the expense and reports the liability on the company's balance sheet.
The entry reflects the matching principle in accounting, which states expenses should be matched with the revenues of the corresponding period. Since the cash has not yet been paid, it would be incorrect to credit Cash. The correct option is D: debit Estimated Lawsuit Loss and credit Estimated Lawsuit Liability.
The correct journal entry required in this situation is option D: debit Estimated Lawsuit Loss and credit Estimated Lawsuit Liability.
This entry reflects the estimated loss due to the pending lawsuit and creates a liability for the company.
By debiting the Estimated Lawsuit Loss account, the company recognizes the estimated loss, and by crediting the Estimated Lawsuit Liability account, the company acknowledges its legal obligation resulting from the lawsuit.