Question

In May 2017, a child was injured at a play area at the Kakisa Design Furniture Shoppe. The play area was provided so parents could leave their children while they shopped in the store. The parents of the child thought the in jury was due to poor supervision and poor maintenance, so they are suing Kakisa for $1 million. As of December 31, 2017 (Kakisa's year-end), the lawsuit hasn't been settled. Kakisa's lawyers believe that the company will probably lose the lawsuit if it goes to trial. The lawyers think that Kakisa stands to lose somewhere between $75,000 and $350,000. Kakisa is a family-owned business but no family members are involved in the man agement of the store. The financial statements are used by the members of the Kakisa family, for tax purposes, and by the store's banker. In January 2019, the lawsuit was finally settled, with Kakisa paying the family of the injured child $150,000.

Required:
a. Prepare a report to Kakisa's president explaining the accounting issues that must be considered in deciding how to account for the lawsuit in the December 31, 2017 financial statements. Provide a recommendation on how the lawsuit should be accounted for and explain your reasoning fully.
b. What are the accounting issues that would have to be considered when the December 31, 2018 financial statements are prepared?



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  • CreatedFebruary 26, 2015
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