= Ina recent annual report, Quaker Oats disclosed the following: www.QuakerOats.com On December 18, 1990, Judge Prentice H. Marshall of the United States District Court for the Northern District of Illinois entered judgment against the Company in favor of Sands, Taylor & Wood Co., holding that the use of the words “thirst aid” in advertising Gatorade thirst quencher infringed the Plaintiff’s rights in the trademark THIRST-AID. On July 9, 1991, Judge Marshall entered a judgment of $42.6 million, composed of $31.4 million in principal, prejudgment interest of $10.6 million, and fees, expenses and costs of $0.6 million. The order enjoined use of the phrase

“THIRST-AID” in connection with the advertising or sale of Gatorade thirst quencher in the United States. The Company appealed the judgment.

On September 2, 1992, the Court of Appeals for the Seventh Circuit affirmed the finding of infringement, but found that the monetary award was an inequitable “windfall” to the Plaintiff, and it therefore remanded the case to the District Court. On June 7, 1993, Judge Marshall issued a judgment on remand of $26.5 million, composed of $20.7 million in principal, prejudgment interest of $5.4 million, and fees, expenses and costs of $0.4 million. The Company appealed this judgment. On September 13, 1994, the Court of Appeals affirmed the lower court’s award of a reasonable royalty and prejudgment interest, but again remanded the case to allow the District Court to explain the enhancement of the royalty award. On April | 1, 1995, Judge Marshall affirmed his prior ruling and the Company filed another appeal. Management, with advice from outside legal counsel, has determined that the Court of Appeals’ opinion appears to indicate a range of exposure between $18 million and $30 million.

Required: Explain when you think that Quaker Oats should have recorded the effects of the litigation in the financial statements. How much do you think it should have recorded?

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