On February 20, 20X8 you are well into the field work of the 12/31/20X7 audit and the following issues have arisen during the audit of Kiefer Sports Equipment Company (KSEC.) 1. Service revenue 2. Account receivable from officers 3. Prepaid advertising 4. Alan Summit Company receivable 5. Inventory 6. "Bring Your Daughters and Sons to Work Day" litigation Kate Kiefer the president of KSEC wants you to present your position on each of these issues as she would like your judgment as to "good GAAP" numbers. But, she has also pointed out that she understands that GAAP often does not provide a precise answer, and in such cases, she would rather error on the side of maintaining income rather than being "an overly pessimistic doomsayer." The attitude of Board of Directors members is consistent with that of Kate. Prepare a memo that summarizes relevant professional standards (standard and paragraph shuld be cited) related to each of the 6 issues and prepare any proposed journal entries. Discuss information that would be included in any note disclosures related to each of the six items (you need not draft formal note disclosures). Prepare entries for all misstatements you identify, regardless of the amount involved. That is, don't simply say no entry is needed because any amount involved would be immaterial. Assume that the current income is $1,323,839. For purposes of preparing journal entrics, you may ignore income tax implications as any changes in taxes will be reflected later in the audit process after any entries have been posted to the working trial balance. Summarize the income effects (before tuxes) of any entries that you propoOse on a schedule such as the following (make clear over and understatements of income): Income Effect 1. Uscamed service revenue 2. Account receivable from officers 3. Prepaid advertising 4. Alan Summnit Company receivable 5. Inventory 6. "Bring your Daughters and Sans to Work Day" litigation Issue 6: Bring Your Daughters and Sons to Work Day Litigation On "Bring Your Daughters and Sons to Work Day" at Winglo Corporation not only did Sandy Gilhaus, a Winglo employee, bring her ten year old daughter Sarah to work, but KSEC also demonstrated new sport equipment at Winglo on that day. After the demonstration of a highly sophisticated machine, Sandy attempted to adjust the monitor on the machine. She inadvertently knocked the machine off the desk and onto the floor. It shattered with a piece of the metal striking Sarah's right big toe. To make a long story short, Sarah's toe needed four stitches to stop the bleeding and Sandy has blamed the demonstrator of the machine for placing it in a dangerous position. The damages to this point have been minimal as Sandy drove Sarah to their HMO and paid the $20 copay for an office visit. Yet, the Gilhaus family has sued KSEC for the following: Likely future plastic surgery 24 500,000 1,200,000 $1,705,000 5,000 Emotional distress to Sarah Emotional distress to Sandy Total KSEC's lawyers believe that this case, with the possible exception of the plastic surgery (for which the HMO won't pay), is frivolous. KSEC has no insurance to cover this sort of liability. If this case goes to court, KSEC's on staff attorneys will handle the case. To eliminate any possible bad press from this case, KSEC's lawyers suggested settling for a "nuisance value" of $10,000. Sarah's family rejected this offer out of hand and asked for $200,000 to settle this out of court. KSEC has decided, at least at this point, to refuse any further settlement offer. In their lawyer's letter to you KSEC's lawyers indicated that they believe that KSEC has "just and meritorious defense available" to fight this case. Furthermore, KSEC's legal counsel for the case indicated that while she agrees that this case is largely frivolous, litigation involving a young child is somewhat of a crap shoot" and that making a definite prediction on the outcome of the case is impossible. In the end she believes the judgment will likely be $5,000 for the plastic surgery. What entry or disclosure, if any, is necessary in this circumstance?