Morgan Stanley is a leading investment bank founded in 1935. The company's fiscal year ends December 31, 2013, and it filed its financial statements with the SEC on February 25, 2014. On February 5, 2014,Bloombergreported that Morgan Stanley would make a $1.25 billion settlement with the Federal Housing Finance Agency:
Morgan Stanley said yesterday it reached a $1.25 billion deal to end Federal Housing Finance Agency claims the bank sold faulty mortgage bonds to Fannie Mae (FNMA) and Freddie Mac (FMCC) before the firms' losses pushed them into U.S. conservatorship. . . . Morgan Stanley, which disclosed its settlement in a regulatory filing yesterday, was among 18 banks sued by the FHFA in 2011. Authorities sought to recoup some losses taxpayers covered when the government took control of the failing mortgage-finance companies in 2008.
Required:
1. From an accounting perspective, how should Morgan Stanley have treated the settlement?
2. Relying on the information provided by the news article, re-create the journal entry Morgan Stanley recorded for the settlement. Assume it had not made any prior liability accrual with respect to this litigation.
3. Suppose the settlement had occurred after February 25, 2014. How should Morgan Stanley have treated the settlement?