ACCT 2310: Intermediate Accounting I

Problem: On a rainy afternoon two years ago, John Smiley left work early to attend a family birthday party. Eleven minutes later, a careening truck slammed into his SUV on the freeway causing John to spend two months in a coma. Now he cant hold a job or make everyday decisions and is in need of constant care. Last week, the 40-year-old Smiley won an out-of-court settlement from the truck drivers company. He was awarded payment for all medical costs and attorney fees, plus a lump-sum settlement of $2,330,716. At the time of the accident, John was president of his familys business and earned approximately $200,000 per year. He had anticipated working 25 more years before retirement.

Johns sister, an acquaintance of yours from college, has asked you to explain to her how the attorneys came up with the settlement amount. They said it was based on his lost future income and a 7% rate of some kind, she explained. But it was all legal-speak to me.

Questions:

• How was the amount of the lump-sum determined? Create a calculation that might help Johns sister understand.
• Was the settlement fair? Explain.
• Write a brief reflection of how this assignment fits into your program and prepares you for your field of study.