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 $ 5,000

Emotional distress to Sarah 500,000

Emotional distress to Sandy 1,200,000

Total $1,705,000

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? What is the journal entry?