You did such a great job on research projects in grad school that you decided to accept a job offer as an accounting research assistant. Destiny Brown, your new immediate supervisor (your professor)...

Memorandum
TO:        
FROM:    
DATE:        
SUBJECT: Analysis regarding research project of lawsuit claims.
    
Brief introduction about the case study
Dawson Tea and Spice Shoppe (DTSS) is selling bulk spices, loose tea leaves, and
ewed tea beverages through its various stores throughout the Southwest and it is owned by Greg Dawson. DTSS has expanded its business multi-fold and expanded its menu in a significant manner. Recently, in Jan 2019 more than 100 customers of the organization became very ill and some of the customers were also hospitalized. The major reason for the illness of customers was an account of salmonella poisoning that was associated with a salad and the ingredients of the salad were purchased from a new vendor i.e. Mario Euro’s farms. The customers demanded money from the firm on account of either their hospitalization or severe organ damage. The customers filed the lawsuit, and the auditor has also performed independent audit procedures to get clarity on the probable claim amount. In the case study, we need to analyze various aspects of accounting standards i.e., ASC guidelines concerning a lawsuit filed by the customers and relevant accounting treatment in the books of the firm.
Issues or questions under consideration
In the case study, the customer has filed lawsuits against the firm and the probable amount of the claim filed was $20 million as damages. As a part of audit procedures, the auditor also sent the audit inquiry to DTSS’s legal counsel and the counsel reverted that the estimated amount of damages or claims can be ranging between $2 to 3 million and there is no possibility of other claims to arise. In this case, various questions under consideration need to be analyzed:
· What are the legal consequences of damage filed by the /customers? Is the firm liable to pay damages to the customers whereas the major fault was one of the poor quality ingredients supplied by a third-party vendor?
· What are the conditions to be met for recognizing the loss contingencies in the financial statements?
· To what extent the firm should make provisions for loss contingencies and what basis should be considered for contingencies? (Deloitte Haskin, 2020)
· What are the disclosure requirements and what are the accounting standard guidelines for recognizing the loss contingencies
?
In this case, all the above-mentioned four questions should be analyzed from the accounting research point of view and accordingly, the detailed documents for audit filing should be prepared. The detailed analysis or memo for the case should be prepared by the auditor for his working purposes and accordingly should make the changes in its report.
Relevant law provisions and accounting treatment
ASC 450 contingencies define the accounting treatment and recognition criteria for loss contingencies. As per ASC 450-20-15-1, various scopes...