On November 4, 2019 HEMI was sued for $50,000,000 in damages because one of its transmissions was incorrectly installed by Suncor repair technicians which resulted in significant property damage. HEMI’s lawyers are of the opinion that the lawsuit is without any merit as the transmission supplied by HEMI was working properly. The problem was with the incorrect installation of the transmission. HEMI plans to defend itself through the Canadian legal system which may take as long as 3 years. The Accountant has recorded $40,000,000 in the general ledger because $10,000,000 of damages will be paid for HEMI’s insurance company. The Accountant wants you to explain the appropriate accounting treatment for this contingent loss. Provide an adjusting journal entry, if any, to properly account this contingent loss considering that the contingent loss is already recorded in the accounting records.

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Contingent liabilities may be divided into three categories depending on the chances of occurrence o... View the full answer