7.6 Accrual for a Lawsuit, Writing an Issues Memo

Your company has just been named as defendant in a lawsuit related to a food poisoning incident. The plaintiff is suing for $200,000 in damages; your company believes the ultimate amount of loss could range between $25,000 and $175,000, with no amount in the range more likely than other amounts in the range. The lawsuit is expected to be resolved in the second quarter of next year.

Citing from authoritative literature, prepare a brief accounting issues memo to the files addressing (1) whether a loss should be accrued, and for what amount, and (2) what disclosures should be made in the companys financial statements.