Gadget, Inc. is a publicly-traded company with annual revenue of $250 million and a December 31 year-end. Gadget is the leading manufacturer and distributor of products intended to make life easier for society. Amelia Emerson, a CPA and the Controller of Gadget, requests advice from your accounting firm about a problem she is facing in her company. Gadgets most popular product is the Whatchamacallit. There is not anything that this device cannot do. As a result, Gadget has experienced enormous demand for this product with unfilled back orders totaling six months. In only a short time, sales have surpassed Gadgets previously most popular product, the Super Widget. Amelias problem arose over a lawsuit brought against Gadget by Doodad & Gizmo, Inc. Doodad manufactures the Thingamabob, which is very similar to the Whatchamacallit. Doodad alleged in a federal complaint filed on February 15 of the current year in the U.S. District Court for the Northern District of California that Gadgets Whatchamacallit infringed on Doodads intellectual property: its patent, user interface, and style. A serious weakness in Gadgets legal defense is that the design engineer who developed the Whatchamacallit for Gadget was previously employed by Doodad when the Thingamabob was being developed. In late November, Gadgets attorney, General Counsel Lee Gill, advised Gadgets management that the case could take over a year to litigate, not including appeals. Even though the case is only in the early stages of discovery, Lee Gill believes that, based on evidence collected to complete these initial discovery requests, it is likely that Gadget will ultimately have some liability to Doodad. Lee Gill estimates that a judgment for as much as $20 million could be rendered against Gadget. Lee Gill also estimates that the case could be settled out of court for $9 million, saving both parties the cost of litigation. Further, Lee Gill estimates that $9 million is likely the least amount Gadget would have to pay in damages to Doodad if the case goes to trial. In a meeting with Gadgets CEO and CFO in early December, Amelia explained that Doodads lawsuit might require an accrual in Gadgets financial statements for the current year of all or part of any estimated future judgment against Gadget. The CEO asked Amelia what she means by the word accrual. Amelia explained that a judgment in the future against Gadget would need to be accrued and accounted for as a loss in the current year, which would reduce Gadgets net income. The CEO could hardly contain himself, growing visibly upset, responded by exclaiming: Are you serious? This is a lawsuit that will take years, and we might prevail regardless of what the attorneys tell us. If we settle the case or even lose it, that wont happen this year. And do you have any idea what reducing our bottom line by millions of dollars this year would do to the value of our stock, not to mention the bonuses we all get, including you? Next year or the following year we could absorb this loss with the number of new projects we have in development. But not this year. Definitely not this year. The CFO offered what she thought could be a possible compromise by asking: Why not just disclose the existence of the lawsuit in Gadgets financial statements and wait to see what the outcome is later? The CEO expressed that this might work, but strongly suggested to Amelia that she needed to do more research and be absolutely 100% certain before discussing this issue further. However, the CEO made it very clear that mere disclosure was the most that he would find acceptable. Failure to use Turnitin will result in you losing 10 points in ACCT 350. Additional Information To access the applicable section of the AICPA Code of Professional Conduct, go to pages 31 and 32 of http://www.aicpa.org/research/standards/codeofconduct/downloadabledocuments/2014december15contentasof2014may15codeofconduct.pdf Amelia disagrees with both executives, but did not want to argue at the meeting until she could support her position with absolute certainty. Amelia thinks she knows how to account for the lawsuit, but wants you to provide her with your recommendation. Amelia was only recently hired as the Controller of Gadget and doesnt want to upset the CEO and CFO unnecessarily in case she is wrong. Even though its Amelias responsibility to decide how to account for the lawsuit, Amelia is tempted to let the CEO and CFO do what they want. However, she does not want to become involved with financial statements that violate GAAP. In addition to analyzing the accounting issue(s) in your letter, include a brief comment about any ethical issue that Amelia faces. You should look at the AICPA Code of Professional Conduct rule on Integrity and Objectivity. Briefly explain to Amelia the one part of this rule she should most consider in her current situation (subordination of judgment). But remember (and be careful) that the CEO and CFO may be secondary readers of your letter, and that you are creating a part of a written record on this issue. Please note that it is Certified Public Accountants (CPAs) like Amelia who are members of the AICPA and must uphold the AICPA Code of Professional Conduct. I need to Prepare a letter addressed to Amelia Emerson, and FASB do research to support it.