Legal Services Shaky Company has been threatened with a major lawsuit by one of its former customers. In preparation for any potential suit, Shaky Company gave a

$150,000 retainer to the law firm of Gotcha and Thensome for legal services for the next three years.

a. Is the $150,000 payment an asset or an expense to Shaky Company? Explain.

b. If the law firm does no work for Shaky in the first year, should any legal expenses be recognized for the first year?

Explain.

c. If a prepaid legal services account is established, where should the account be reported in the balance sheet?

d. Would the payment of the retainer qualify as a deferred charge? Explain.