In February 2011, Paul Willow slipped on ice in the parking lot of the Frontier Hotel and Resort (Frontier) suffering a fractured ankle and a third-degree concussion. Mr. Willow has been unable to work since the accident, has difficulty walking, and suffers serious headaches. Mr. Willow contends that his fall was due to the negligence of Frontier because of its failure to keep the parking lot free of ice and is suing for \($5\) million for loss of income and pain and suffering. As of December 31, 2012 (Frontier’s year-end), the lawsuit has not been settled. Frontier’s lawyers believe that the company will probably lose the lawsuit if it goes to trial. They think that Frontier stands to lose at least \($1\) million.

Frontier is a family-owned business but no family members are involved in management of the resort. The financial statements are used by the members of the Frontier family, by its banker, and for tax purposes. In January 2014, the lawsuit was finally settled with Frontier paying Mr. Willow \($2.34\) million.

Required:

a. Prepare a report to Frontier’s president explaining the accounting issues that must be considered in deciding how to account for the lawsuit in the December 31, 2012 financial statements. Provide a recommendation on how the lawsuit should be accounted for and explain your reasoning fully.

b. What are the accounting issues that would have to be considered when the December 31, 2013 financial statements are prepared?