Question

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. (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 a December 31, 2017, Gallardo's attorney 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?

Answer 1

Answer:

Following are the solution to the given points:

Explanation:

In point a, As it would be impossible that although the failure of the lawsuit is remote, the same cannot be recorded as well as avoided.

In point b, Its prosecutor thinks Gallardo's failure of the case (which would be likely to occur) is therefore likely to be reported throughout the books, that legal expenses must be paid and the civil responsibility measured at $10,00000 credited.

In point c, In the case is fairly probable, this can occur only if it is reported throughout the corresponding Balance Sheet accounts.