A lawsuit has been filed against Picture Perfect, Inc., a manufacturer of video post cards, by Picture This, another manufacturer of video post cards. The suit alleges patent right infringements by Picture Perfect and asks for compensatory damages. For the following possible situations, determine whether Picture Perfect should report the information concerning the lawsuit as a liability on the balance sheet, and if so, how much; disclose it in a note; or do nothing. Give reasons for your answers.
(a) The suit hasn’t been filed, but Picture Perfect’s legal counsel has informed management that an unintentional patent infringement has occurred.
(b) Picture Perfect’s legal counsel believes an out-of-court settlement is probable and will cost Picture Perfect approximately $750,000.
(c) Picture Perfect’s legal counsel believes it is probable that the case will result in an undeterminable loss to Picture Perfect.
(d) Picture Perfect’s legal counsel is convinced that the suit will result in a loss to Picture Perfect but isn’t sure of the dollar damages.
(e) Picture Perfect’s legal counsel believes there is a remote chance for a loss to occur.
(f) Picture Perfect’s legal counsel believes it is reasonably possible that the case will result in a $3,100,000 loss to Picture Perfect.