Discuss the proper accounting treatment, including any required disclosures, for each situation. Give the rationale for your answers.
Below are three independent situations.
1. In August 2026 a worker was injured in the factory in an accident, partially the result of his own negligence. The worker has sued Barkley Co. for $800,000. Counsel believes it is reasonably possible that the outcome of the suit will be unfavorable and that the settlement would cost the company from $250,000 to $500,000.
2. A suit for breach of contract seeking damages of $3,000,000 was filed by an author against Henderson Co. on October 4, 2026. Henderson's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff is between $1,000,000 and $2,250,000. No amount within this range is a better estimate of potential damages than any other amount.
3. Kroft is involved in a pending court case. Kroft’s lawyers believe it is probable that Kroft will be awarded damages of $1,000,000.
Discuss the proper accounting treatment, including any required disclosures, for each situation. Give the rationale for your answers.
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