Like many other large companies, The Cheesecake Factory Incorporated has several legal actions pending against it at any given time. It must accrue for and/or disclose certain contingent liabilities, such as pending or possible legal actions, in its financial statements and notes to its financial statements. The necessary reporting depends on the specific circumstances of the situations and the company’s attorneys’ assessment of the potential outcomes.

To follow are four hypothetical legal situations that might face The Cheesecake Factory.

Situation A: A former restaurant employee filed a class-action lawsuit alleging that The Cheesecake Factory violated the local law when it required employees to purchase their work uniforms. Legal counsel has indicated that the case will probably be settled for $2,500.

Situation B: A customer filed a lawsuit alleging that The Cheesecake Factory was negligent when she slipped and fell on a wet floor near the bar area in a Cheesecake Factory in Topeka, Kansas. Legal counsel has indicated that the company will most likely settle this case, but counsel is unable to estimate the dollar amount of the settlement.

Situation C: A customer filed a lawsuit alleging that The Cheesecake Factory caused her severe emotional distress when her favorite dessert was out of stock for her birthday dinner at the restaurant. Legal counsel has indicated that the chance of losing this lawsuit is remote.

Situation D: A former restaurant hourly employee filed a class-action lawsuit for $200,000 alleging that The Cheesecake Factory violated the local law by failing to pay overtime. Legal counsel has stated that it is reasonably possible, but not probable, that The Cheesecake Factory could lose the lawsuit.

Requirement

1. Describe the accounting treatment for each of the contingent liabilities listed. Support your answers.