In early 1991 Lifschultz Industries, a small gas meter company, reported a book value of less than zero (i.e., reported liabilities exceed reported assets). Yet, in late March the company’s stock price skyrocketed on news that it was pursuing a massive antitrust and racketeering law¬ suit against three of the country’s biggest truckers: Consolidated Freightways, Roadway Services, and Yellow Freight Systems. Lifschultz alleged that these truckers conspired to engage in anti-competitive activity, driving it out of the trucking business. The suit, filed in U.S. district court in South Carolina, seeks $1.8 billion. The three truckers have said nothing about the suit publicly other than to footnote it as a “contingency” in their annual reports. REQUIRED:

a. Explain how Lifschultz can report negative book value and, at the same time, have its stock so highly valued in the stock market.

b. Explain the differences between how Lifschultz should account for the suit and how the three trucking companies should account for it.

c. Provide economic reasons why the plaintiff and defendants account for the same dispute differently.