Exwella Pharmaceuticals, Inc. is involved in various lawsuits regarding product liability, commercial liability, and other matters that arise from time to time in the ordinary course of business. The lawsuits pending at the beginning of the year and those filed in the current years are detailed below. Pending Lawsuits at the Beginning of the Year.
1. Product liability lawsuit related to Nowaya, a pharmaceutical drug, in which claimants seek substantial damages. Exwella’s attorneys assess the likelihood of losing the lawsuit as reasonably possible at 60%. At the beginning of the year, the estimated loss ranged from $ 500,000 to $ 1,500,000. At the end of the year, the attorney’s assessment of the loss increased to a range between $ 750,000 and $ 2,000,000.
2. A personal injury lawsuit in which a claimant seeks substantial damages. Exwella’s attorneys assess the likelihood of losing the lawsuit as probable at 95%. At the beginning of the year, Exwella reported a contingent liability of $ 750,000 for the lawsuit. At the end of the year, the attorney’s assessment of the loss increased to a range between $ 900,000 and $ 3,000,000. NewPending Lawsuits.
3. A new product liability lawsuit was filed related to the drug Dontacit. Exwella’s attorneys assess the likelihood of losing the lawsuit as remote at 10%. The attorney’s assessment of the loss increased to a range between $ 10,000,000 and $ 15,000,000.
4. A new product liability lawsuit was filed related to the drug Noapproval. Exwella’s attorneys assess the likelihood of losing the lawsuit as probable. The attorney’s assessment of the loss increased to a range between $ 2,000,000 and $ 4,000,000.
Required
a. Explain how each of the lawsuits is accounted for under U. S. GAAP.
b. Prepare any journal entries required at the end of the year.