The Springfield Clinic is owned and operated by ten local doctors as a partnership. Recently, a paralyzed patient sued the clinic for malpractice, for a total of $20 million. The clinic carries malpractice liability insurance in the amount of $10 million. There is no provision for the possible loss from this type of lawsuit in the partnership's financial statements. The condensed balance sheet for 2014 follows.

1. How should information about the lawsuit be disclosed in the December 31, 2014, financial statements of the partnership?
2. Assume that the clinic and its insurance company settle out of court by agreeing to pay a total of $10.1 million, of which $100,000 must be paid by the partnership. What effect will the payment have on the clinic's December 31, 2014, financial statements? Discuss the effect of the settlement on the Springfield Clinic doctors' personal financial situations.

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Springfield Clinic Condensed Balance Sheet December 31, 2014 Assets Current assets Property, plant, and equipment (net) Total assets $246,000 750,000 $996,000 Liabilities and Partners' Equity $180,000 675,000 Current liabilities Total liabilities Partners' equity Total liabilities and partners' equity $855,000 141,000 $996,000