Your company, has has just been named as defendant in a lawsuit related to an accident in one of its plants in
2018 in which an employee was severely injured and unable to continue to work. The plaintiff is suing the company for $5 million in damages. The company's attorneys believe a. Unfavorable outcome is likely and that the ultimate amount of loss could range between $1 million and $3 million, with no amount in the range more likely than other amounts in the range. The lawsuit is expected to be resolved in the middle of next fiscal year. The company has in place an insurance policy that is expected to cover damages from accidents of this nature up to a maximum of $4 million, but it has not yet addressed the potential claim with the insurer. Your memo should address (1) whether a loss should be accrued, and if so, for what amount, (2) the financial reporting implications of the insurance coverage and (3) what disclosures should be made in the company's financial statements.
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