Authors Academic Publishing faces three potential contingency situations, described below. Authors' fiscal year ends December 31, 2012.
Required:
Determine the appropriate means of reporting each situation for the year ended December 31, 2012, and record any necessary entries. Explain your reasoning.
1. In August 2012, a worker was injured in an accident, partially as a result of his own negligence. The worker has sued the company for $1 million. Legal counsel believes it is reasonably possible that the outcome of the suit will be unfavorable, and that the settlement would cost the company from $250,000 to $500,000.
2. A suit for breach of contract seeking damages of $2,000,000 was filed by an author on October 4, 2012. Legal counsel believes an unfavorable outcome is probable.
A reasonable estimate of the award to the plaintiff is between $1 million and $1.5 million. No amount within this range is a better estimate of potential damages than any other amount.
3. Authors is the plaintiff in a pending court case. Its lawyers believe it is probable that Authors will be awarded damages of $2 million.