Honda Motor Company, Ltd., is a Japanese manufacturer of automobiles, motorcycles, and power equipment. The company’s fiscal year ends Mach 31, 2020, and it filed its financial statements with the SEC on June 22, 2020. On August 26, 2020, Reuters reported that Honda would make a $85 million litigation settlement with U.S. states.

Required:
1. From an accounting perspective, how should Honda have treated the settlement if it occurred before June 22, 2020?
2. Relying on the information provided by the news article, re-create the journal entry Honda recorded for the settlement. Assume it had not made any prior liability accrual with respect to this litigation.
3. From an accounting perspective, how should Honda have treated the settlement if it occurred after June 22, 2020?

Transcribed Image Text:

Units of Honda Motor Co (7267.T) have agreed to pay $85 million to settle an investigation by most U.S. states... connected with the ongoing recalls of tens of millions of vehicles equipped with potentially defective Takata inflators that were sold by Honda and other major auto manufacturers over the past 20 years.