Gallardo Co. is involved in a lawsuit as a result of an accident that took place September 5, 2017.

Gallardo Co. is involved in a lawsuit as a result of an accident that took place September 5, 2017. The lawsuit was filed on November 1, 2017, and claims damages of $1,000,000.

Instructions

(a) At December 31, 2017, Gallardo’s attorneys feel it is remote that Gallardo will lose the lawsuit. How should the company account for the effects of the lawsuit?

(b) Assume instead that at December 31, 2017, Gallardo’s attorneys feel it is probable that Gallardo will lose the lawsuit and be required to pay $1,000,000. How should the company account for this lawsuit?

(c) Assume instead that at December 31, 2017, Gallardo’s attorneys feel it is reasonably possible that Gallardo could lose the lawsuit and be required to pay $1,000,000. How should the company account for this lawsuit?

Expert Solution

(a)

Since the loss of lawsuit is remote that is it is unlikely to occur, the same need not be recorded and to be ignored.

(b)

Because the attorney feels that Gallardo will lose the lawsuit that is the lawsuit is probable (likely to occur) hence it should be recorded in the books. The Lawsuit expense should be debited and estimated lawsuit liability to be credited on $1000000.

(c)

Because the lawsuit is reasonably possible that is could happen than it can just be disclosed in the notes of accounts of the accompanying Balance Sheet.

Junaid answered 2 years ago

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