Contingent Liabilities

Facts:

• A company is sued prior to the financial statement date (i.e. year-end) . Before the financial statements are issued, the suit is settled for $825,000, a material loss to the company.
• Before year-end, a company is assessed $200,000 in additional taxes as a result of an IRS audit. The companys tax attorney believes that a settlement with the IRS can be reached for $80,000. Settlement has not been reached before the financial statements are issued.

Required: For both cases discussed above, answer two questions:

1. Should the company record a loss reserve at year end, and if so, for how much?
2. Should the company disclose this matter in the footnotes to the companys financial statements at year end?