Below are three independent situations (under GAAP)

1. Blue is involved in a pending court case. Blue's lawyers believe it is probable that Petillo will be awarded damages of $16,000,000. (Discuss from Blue's perspective)

2. In February 2021, a worker was injured in the factory in an accident partially the result of his own negligence. The worker has sued Red Co. for $800,000. Counsel believes it is reasonably possible that the outcome of the suit will be unfavorable and that the settlement would cost the company from $250,000 to $500,000.

3. A suit for breach of contract seeking damages of $2,400,000 was filed by Purple against Orange Co. on January 4, 2021. Orange's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the settlement is between $300,000 and $900,000. No amount within this range is a better estimate of potential damages than any other amount.

Instructions

In a brief paragraph, discuss the proper accounting treatment if a contingency is a gain or loss contingency, if it should be accrued, disclosed, or ignore. Give the rationale for your answers. Also, provide a journal entry, if applicable.