In Year 1, Better Sleep Company began to receive complaints from physicians that patients were experiencing unexpected side effects from the company’s sleep apnea drug. The company took the drug off the market near the end of Year 1. During Year 2, the company was sued by 1,000 customers who had had a severe allergic reaction to the company’s drug and required hospitalization. At the end of Year 2, the company’s attorneys estimated a 60 percent chance the company would need to make payments in the range of $1,000 to $5,000 to settle each claim, with all amounts in that range being equally likely. At the end of Year 3, while none of the cases had been resolved, the company’s attorneys now estimated an 80 percent probability the company would be required to make payments in the range of $2,000 to $7,000 to settle each claim. In Year 4, 400 claims were settled at a total cost of $1.2 million. Based on this experience, the company believes 30 percent of the remaining cases will be settled for $3,000 each, 50 percent will be settled for $5,000, and 20 percent will be settled for $10,000.Required: Prepare journal entries for Years 1–4 related to this litigation

The contingent liabilities will be recorded as a liability in the balance sheet if the probability…

Answered: In Year 1, Better Sleep Company began…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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In Year 1, Better Sleep Company began to receive complaints from physicians that patients were experiencing unexpected side effects from the company’s sleep apnea drug. The company took the drug off the market near the end of Year 1. During Year 2, the company was sued by 1,000 customers who had had a severe allergic reaction to the company’s drug and required hospitalization. At the end of Year 2, the company’s attorneys estimated a 60 percent chance the company would need to make payments in the range of $1,000 to $5,000 to settle each claim, with all amounts in that range being equally likely. At the end of Year 3, while none of the cases had been resolved, the company’s attorneys now estimated an 80 percent probability the company would be required to make payments in the range of $2,000 to $7,000 to settle each claim. In Year 4, 400 claims were settled at a total cost of $1.2 million. Based on this experience, the company believes 30 percent of the remaining cases will be settled for $3,000 each, 50 percent will be settled for $5,000, and 20 percent will be settled for $10,000.

Required: Prepare journal entries for Years 1–4 related to this litigation

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