Reference no: EM133061577
Question - Lyco Links Corp. (Lyco) is a publicly traded company that manufactures small toy trains designed for children between the ages of three and nine years old. In March 2020, Lyco was notified that some of the train wheels were falling off and being swallowed by young children and pets. After an investigation, Lyco issued a recall for 30 different batches of trains that had been impacted by a flawed manufacturing process. The recall was initiated on May 1, 2020. Luckily this flaw has NOT resulted in any deaths, but 14 children and two pets have been injured so far.
On November 1, 2020, Lyco received notice of several lawsuits as a result of the injuries, totalling $6,500,000. Lyco's lawyers have stated that it is very likely to be found liable. Lyco's lawyers believe that there is a 60% chance that Lyco will have to pay a total of $4,200,000, a 22% chance that it will have to pay a total of $5,500,000, and an 18% chance that it will be have to pay the entire amount.
The former customers suing Lyco are also requesting that Lyco pay for their court costs totalling $150,000, which Lyco's lawyers believe will be owed in all scenarios.
Required - Describe how this scenario should be recorded on the books of Lyco for the year ended December 31, 2020. Prepare any journal entries (if necessary).