Lyco Links Corp. (Lyco) is a publicly traded company that manufactures small toy trains
designed for children between the ages of three and nine years old. In March 2020,
Lyco was notified that some of the train wheels were falling off and being swallowed by
young children and pets. After an investigation, Lyco issued a recall for 30 different
batches of trains that had been impacted by a flawed manufacturing process. The recall
was initiated on May 1, 2020. Luckily this flaw has NOT resulted in any deaths, but 14
children and two pets have been injured so far.

On November 1, 2020, Lyco received notice of several lawsuits as a result of the
injuries, totalling $6,500,000. Lyco’s lawyers have stated that it is very likely to be found
liable. Lyco’s lawyers believe that there is a 60% chance that Lyco will have to pay a
total of $4,200,000, a 22% chance that it will have to pay a total of $5,500,000, and an
18% chance that it will be have to pay the entire amount.

The former customers suing Lyco are also requesting that Lyco pay for their court costs
totalling $150,000, which Lyco’s lawyers believe will be owed in all scenarios.

Required:

Describe how this scenario should be recorded on the books of Lyco for the year ended
December 31, 2020. Prepare any journal entries (if necessary).