Gallardo Co. is involved in a lawsuit as a result of an accident that took place September 5, 2017. The lawsuit was filed on November 1, 2017, and claims damages of $1,000,000.

Instructions

(a) At December 31, 2017, Gallardo’s attorneys feel it is remote that Gallardo will lose the lawsuit. How should the company account for the effects of the lawsuit?

(b) Assume instead that at December 31, 2017, Gallardo’s attorneys feel it is probable that Gallardo will lose the lawsuit and be required to pay $1,000,000. How should the company account for this lawsuit?

(c) Assume instead that at December 31, 2017, Gallardo’s attorneys feel it is reasonably possible that Gallardo could lose the lawsuit and be required to pay $1,000,000. How should the company account for this lawsuit?