A customer got serious food poisoning from Tasty Feast restaurant on March 30, 2

Question

A customer got serious food poisoning from Tasty Feast restaurant on March 30, 20x2, necessitating a trip to the emergency room. On April 5, 20x2, the customer initiated a lawsuit. At December 31, 20x2, Tasty Feast estimated its probable loss to be $50,000. In January, 20x3, before issuance of Tasty Feast’s financial statements, a judge ruled in favor of the customer and awarded the customer $80,000 in damages. Must the company recognize the effects of this ruling in its 20x2 financial statements? Explain.

Explanation / Answer

Yes company must recognize the effect of this ruling in it's 20x2 financial statements because it's now a liability for the company.

Liability means

Here all these conditions are satisfied so it should be recorded as a liability. Normally lawsuit filed against the company come under contingent liabilities which are recoded on estimated basis.

As in this case judge ruled in favor of the customer and awarded the customer $80000 in damages. So it can be measured also restaurant was already making estimate for it's probable loss to be $50000. Therefore this amounts to liability and should be recorded as per above three basic conditions for liability.

Method of recognition

It should be recorded as liability on the balance sheet and and as a loss on the in the income statement.

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