Carson Company Faces a Probable Loss on a Pending Lawsuit

Multiple Choice

Carson Company faces a probable loss on a pending lawsuit where the amount of the loss is estimated to be $500,000. The journal entry to recognize the potential loss is:

A) Debit Lawsuit Payable $500,000, credit Contingent Legal Liability $500,000.
B) Debit Legal Expense $500,000; credit Lawsuit Payable $500,000.
C) Debit Contingent Legal Expense $500,000, credit Contingent Legal Liability $500,000.
D) Debit Prepaid Legal Expense $500,000; credit Contingent Legal Liability $500,000.
E) No journal entry is required.