Cruisin’, Inc. manufactures and sells two-person snow tubes. Periodically, the company is sued because someone using this product is injured. Cruisin’ is currently the defendant in one such lawsuit. Damages requested by the plaintiff in this lawsuit total $2,400,000. The company’s net income for its fiscal year just ended was $460,000, and year-end total assets were $1,232,000.
Required:
(a) What factors should Cruisin’ consider in determining the accounting and financial statement treatment of this lawsuit?
(b) In reference to the pending law suit against Cruisin’, identify the conditions under which:
(1) Cruisin’ would record an expense and a liability in its accounting records.
(2) Cruisin’ would disclose the lawsuit in the footnotes to its financial statements.
(3) Cruisin’ would ignore the law suit for accounting and financial reporting purposes.