In Year One, the Yankee Corporation allegedly damaged the Sox Corporation. The Sox

Corporation sued the Yankee Corporation for $1 million. At the end of Year One, both companies believed that an eventual payment of $300,000 by Yankee was probable, but a payment of $480,000 was reasonably possible. The case moved through the court system rather slowly, and at the end of Year Two, both companies had come to believe that an eventual payment of $340,000 by Yankee was now probable, but a payment of $700,000 was reasonably possible. In Year Three, this lawsuit is settled for $275,000 in cash.

a. Determine the income effect to be reported by each company for each of these three years.

b. Discuss how the financial reporting might be different if these companies were reporting according to IFRS instead of U.S. GAAP.