After the audit of its 2020 financial statements, Pep Boys (Boys), a private company, decided to change auditors. The predecessor auditor issued an unmodified auditors report dated February 16, 2021, on Boys 2020 financial statements. Your firm was engaged to audit Boys 2021 financial statements.

In connection with your audit of Boys 2021 financial statements, Manny called you on January 23, 2022, and informed you of the following two significant matters:

(1) During a family reunion on January 10, 2022, an argument broke out between the brothers regarding their contributions to the current operations of the company. Specifically, Manny and Moe claimed that Jack had been spending too much time trying to improve his golf game instead of trying to improve sales. During 2021, Huey and Louie watched Jack fly south to play golf as sales headed south. After a heated argument, the three brothers mutually agreed Jack did not earn the $500,000 salary he received for the year ended December 31, 2021. Jack agreed to accept $400,000 as compensation for 2021, and agreed to give back to Boys the $100,000 difference. Furthermore, the brothers agreed that Jacks 2022 salary would not be affected by this decision and Jack agreed to spend more time concentrating on the company in the current year.

(2) A lawsuit that was filed against the Company in the second quarter of 2021 was settled on January 21, 2022. The lawsuit claims certain parts produced by Boys in the first quarter of 2021 were defective. Unfortunately, the $1.5 million that Boys anticipated it would settle for (and accrued in its balance sheet as of December 31, 2021) was underestimated by $300,000. Boys total liability would be $1.8 million based on the settlement.

You completed your audit of Boys 2021 financial statements and issued your unmodified opinion thereon, dated February 7, 2022 (which was also the date the financial statements were available to be issued). Boys 2021 and 2020 financial statements and your opinion on Boys 2021 financial statements will be included in Boys 2021 annual report. The predecessor auditors report on Boys 2020 financial statements has not been reissued and will not be included in Boys 2021 annual report.

How should the settlement of the lawsuit be dealt with in Boys 2021 financial statements (should the liability related to the lawsuit as of December 31, 2021 be $.0, $1.5 million or $1.8 million)?