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Burying the Hatchet

In:

Submitted By nazmunashraf
Words 1083
Pages 5
Memorandum
To: Pat Tyler
From: Naz
Date: 4/17/16
Re: Mighty Mufflers Corp. (MMC) Loss Contingencies
Issues
The complexity of MMC’s accounting for its litigation liability must be addressed in three components. First, we must determine the amount necessary to be accrued as of December 2012 from the First Settlement. Next, we must determine the placement of the aforementioned accrual from the First Settlement on the income statement. Finally, we must determine how to account for the True-Up Payment as of December 2012.
In the First Settlement, MMC agreed to a total settlement of $30 million; $10 million of this is due in 2013, $10 million will be issued as a rebate on 2013 purchases made by plaintiffs, and the final $10 million will be due in 2014. There are seemingly few options, some of which are viable, in the accounting of the First Settlement. The options are to omit any recognition of the settlement since no payments were due in 2012 (but make a disclosure in the footnotes of the financial statements), accrue a portion of the $30 million on the balance sheet, or accrue the entire $30 million on the balance sheet.
The aforementioned accrual, and the decision in how to recognize it as of December 2012, will impact the income statement. If no entry is made to accrue any amount from the First Settlement, there will be no effect on the income statement. If a portion or all of the First Settlement is accrued, then it can be recognized as an extraordinary loss on the income statement (so long as lawsuits and settlements are not commonplace for MMC).
The True-Up Payment, an amount determined by a formula applied to the Second Settlement, is capped at $5 million. As of December 2012, MMC has not yet established an amount for the Second Settlement as the settlement and terms have yet to be established. The True-Up Payment can be recognized similarly to the First

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