2. Below are three independent situations.
a. In August, 2012 a worker was injured in the factory in an accident
partially the result of his own negligence. The worker has sued Crusher
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.
b. A suit for breach of contract seeking damages of $2,400,000 was filed by an
author against Parker Co. on October 4, 2012. Parker’s legal counsel
believes that an unfavorable outcome is probable. A reasonable estimate
of the award to the plaintiff is between $600,000 and $1,800,000. No
amount within this range is a better estimate of potential damages than
any other amount.
c. Rose is involved in a pending court case. Rose’s lawyers believe
it is probable that Rose 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.