Question

Harrington Company was sued by an employee in late 2017. General counsel concluded that there was an 70 percent probability that the company would lose the lawsuit. The range of possible loss is estimated to be $34,000 to $78,000, with no amount in the range more likely than any other. The lawsuit was settled in 2018, with Harrington making a payment of $67,000.

Assume that a U.S.-based company is issuing securities to foreign investors who require financial statements prepared in accordance with IFRS. Thus, adjustments to convert from U.S. GAAP to IFRS must be made. Required
A. Prepare journal entries for this lawsuit for the years ending December 31, 2017, and December 31, 2018, under (1) U.S. GAAP and (2) IFRS.
B. Prepare the entrylies) that Harrington would make on the December 31, 2017, and December 31, 2018, conversion worksheets to convert U.S. GAAP balances to IFRS.

Answer 1

Step-by-step explanation:

From the given information; the objectives are to:

A. Prepare journal entries for this lawsuit for the years ending December 31, 2017, and December 31, 2018, under (1) U.S. GAAP and (2) IFRS.

B. Prepare the entry(ies) that Harrington would make on the December 31, 2017, and December 31, 2018, conversion worksheets to convert U.S. GAAP balances to IFRS.

A. Journal entries for the lawsuit for the years ending December 31, 2017 and December 31, 2018

1 Under US GAAP Debit Credit

31 Dec, Loss on lawsuit-estimated $34,000

2017 Estimated liability for lawsuit $34,000

(estimated liability provided for lawsuit)

31 Dec, Estimated liability for lawsuit $34,000

2018 Additional loss on lawsuit $33,000

Cash $67,000

(cash paid on settlement)

2 Under IFRS

31 Dec, Loss on lawsuit-estimated $56000

2017 Estimated liability for lawsuit $56000

(estimated liability provided for lawsuit)

31 Dec, Estimated liability for lawsuit $56000

2018 Additional loss on lawsuit $11000

Cash $67000

(cash paid on settlement)

Under US GAAP, if there is a range of possible losses but loss cannot be estimated within that range, the entity will record the low end of the range.

Under IFRS, if loss cannot be estimated with in the range, the entity will record the midpoint of range.

N.B:

Additional loss on lawsuit = 67000 - 34000

Additional loss on lawsuit = 33000

Estimated liability for lawsuit = (32000 + 78000)/2

Estimated liability for lawsuit = 56000

B. Journal entry for conversion from US GAAP to IFRS

31 Dec, Loss on lawsuit-estimated $22000

2017 Estimated liability for lawsuit $22000

31 Dec, Estimated liability for lawsuit $22000

2018 Additional liability for lawsuit $22000