The following are two independent situations. The underlined entity is the reporting entity. 

1. Broken Horse Stables Inc. sued Topnotch Equestrian Inc. for $1 million alleging breach of contract. Topnotch’s legal counsel estimates that Broken Horse’s likelihood of success is about 55%. Based on its experience with cases of this nature, the law firm suggests that if the litigant is successful then it will be awarded $600,000 to $800,000, with all payouts in this range being equally likely. 

2. Meagan Morton broke her arm when she slipped on the ice in front of the office of Boondoggle Inc. On the advice of legal counsel, Boondoggle has offered Morton $200,000 to settle her $400,000 lawsuit. It is unknown whether Morton will accept the settlement offer. Boondoggle’s legal counsel estimates that Morton has a 75% probability of success, and that if successful, she will be awarded $200,000 to $300,000, with all payouts in this range being equally likely.

Required:

a. Assuming that the reporting company prepares its financial statements in accordance with IFRS: 

i. For each of the two situations described above, indicate whether the appropriate accounting treatment is to: 

A. Recognize a liability. 

B. Disclose the details of the contingency in the notes to the financial statements. 

ii. For each situation that requires the recognition of a liability, record the journal entry.

b. Assuming that the reporting company prepares its financial statements in accordance with ASPE:

i. For each of the two situations described above, indicate whether the appropriate accounting treatment is to: 

A. Recognize a liability. 

B. Disclose the details of the contingency in the notes to the financial statements. 

ii. For each situation that requires the recognition of a liability, record the journal entry.