1. Please prepare an analysis of the legal letter

Note from Miranda: I had a call with our lawyer and one of our customers is apparently suing us because when they were visiting us one of the farm cats allegedly bit her. We don’t even have farm cats, so I am a little confused as to what we need to do from an accounting perspective. The lawyer tried to explain that we may need a contingent liability, but he didn’t know much about the accounting side of things. He did say that normally cat bites if they require payment go for around $25,000 and that this case is unlikely that we would have to pay any amount of money.

Can you explain this to me? Do we need to do anything for our financial statements?

Questions:

1. What is a contingent liability?
2. What are our options for accounting treatment, what are the alternative options or scenarios for contingencies?
3. What is your recommendation?