Question

Accounting for a Contingency: Attorney Letter Information. Central City was involved in litigation brought by Mexican American Legal Defense and Educational Fund (MALDEF) over the creation of single- member voting districts (which require candidates to receive only the highest number of votes, even if not a majority) for city council positions. Auditors were working on the financial statements for the year ended December 31, 2014, and had almost completed gathering sufficient appropriate evidence by February 12, 2015.
The court heard final arguments on February 1 and rendered its judgment on February 10. The ruling was in favor of MALDEF and required the creation of certain single- member voting districts. This ruling did not impose a monetary loss on Central City, but the court also ruled that MALDEF would be awarded a judgment of court costs and attorney fees to be paid by Central City.
Local newspaper reports stated that MALDEF would seek a $ 250,000 recovery from the city. Auditors obtained an attorney letter dated February 15 that stated the following: In my opinion, the court will award some amount for MALDEF’s attorney fees. In regard to your inquiry about an amount or range of possible loss, I estimate that such an award could be anywhere from $ 30,000 to $ 175,000.

Required:
a. What weight should be given to the newspaper report of the $ 250,000 amount that MALDEF might ask? What weight should be given to the attorney’s estimate?
b. How should this subsequent event be reflected in the 2014 financial statements of Central City?



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  • CreatedOctober 27, 2014
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