Sleep-a-Bye Baby Company, a public company, is the defendant in a lawsuit alleging that its portable baby cribs are unsafe. The company has offered to replace the cribs free of charge for any concerned parent. Nonetheless, it has been sued for damages and distress amounting to $1.5 million. The company plans to vigorously defend its product safety record in court. 

Instructions 

a. What should the company record or report in its financial statements for this situation? Explain why. 

b. What if Sleep-a-Bye Baby Company’s lawyers advise that it is likely the company will have to pay damages of $100,000? Does this change what should be recorded or reported in the financial statements? Explain. 

c. How would your answers to parts (a) and (b) change if Sleep-a-Bye Baby Company were a private company that had chosen to follow ASPE?