Get Your Motor Runnin’ has recently learned that the family of a previous custom

Question

Get Your Motor Runnin’ has recently learned that the family of a previous customer has filed suit against the company. The lawsuit alleges that Get Your Motor Runnin’ sold a faulty motorcycle engine to a customer and that the engine stalled, causing an accident in which the customer died. The attorney for Get Your Motor Runnin’ predicts that if the lawsuit goes to trial, the company will most likely lose the case; therefore, she is suggesting that the company settle out of court. She suggests offering $500,000 to the family. The Board of Directors is considering the situation, but has not yet made a decision. The accountant for the company has prepared a journal entry to record a contingent liability; however, the company’s chief executive officer (CEO) and board of directors have asked him not to make the journal entry at this time, pending further consultation.

What are two potential actions the company might take and what are the ethical implications of those actions?

How might such actions affect the reliability of the company’s financial statements?

How might the likelihood of losing the lawsuit affect the potential settlement amount, or even the decision to settle? Explain.

If the company settles, when should the liability be recorded? Explain.

Explanation / Answer

Company will bear the cost of injury and will offer compensation to the family of deceased.

It will affect positively on company's reputation as well as financial statements.

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