Linda Rutter, is a manager with the small accounting firm of Parker, Davis and Franks (PDF). PDF specializes in the financial services industries. Linda meets with Jane Bloom, President of Brave Brokerage Inc. (BBI), which is a small brokerage firm providing services to retail investors and day traders. The two meet to discuss the audit of the 2021 1^st quarter financial statements.

Ms. Bloom informs Linda of following situations that have occurred during the 1^st quarter of 2021:

- BBI is being sued by Joey Trader for negligence alleging that he suffered injuries when he slipped and fell over a loose carpet in BBIs office. BBI received notice of the suit in January for $1 million. Bloom has spoken to outside counsel and they believe that they are not likely to lose the suit, but it is possible.

- In February, the court awarded BBI a judgement of $2 million in its copy right infringement case against RH Brokerage for the unauthorized usage of one of their brand tag line where winners trade. RH Brokerage filed an immediate appeal. Bloom wonders if they may recognize the potential benefits in the financial statements this quarter.

- In February, a customer, Lisa Losshirt for $6 million, claiming that the company did not protect her from buying the casino stocks (GameStop, etc.) when they were at their peak. After the prices fell, Ms. Losshirt suffered a huge loss and will need to file for bankruptcy. The outside council for BBI, (Peter & Peterson, Attorneys at Law), believe that the suit has no merit and there a remote chance of loss.

- In December, BBI was sued by a former employee, Ben Arnold. Mr. Arnold claims that the firm damaged his reputation and destroyed his ability to earn a living when they accused him of impropriety and dismissed him. An internal investigation later cleared Mr. Arnold. The suit is for $6.0 million. The outside council believes that it is probable that BBI will lose the lawsuit and estimates that the loss could be $4 million.

- In 2017, BBI was sued for $10 million for copyright infringement by BBI Traders alleging that BBI infringed on their trademark by using their name and similar logo. At the time of the lawsuit, outside counsel believed that it was possible that BBI would lose the case. Based on the information that has been discovered during review of the case during January, outside council believes it is probable that BBI will lose the case with an estimate of $6 million.

Ms. Bloom asks how they should treat each item for the financial statements.

Requirements:

Prepare a memorandum to Ms. Bloom with your opinion as to the accounting and disclosure requirements for each. Be sure to discuss the requirements for accounting for contingencies under US GAAP.