Case 13-8 Accounting for a Loss Contingency for a Verdict Overturned on Appeal

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M International (“M”) and W Inc. (“W,” a competitor of M) have been engaged in long- standing litigation over a specific patent infringement matter. Below is a summary timeline of specific events that have taken place related to this matter: • In May 2007, W filed a claim against M for patent infringement. • For the year ended December 31, 2007, management of M determined that a loss for this matter was probable and represented that the estimate of loss was in the range of $15 million to $20 million, with $17 million being the most likely amount of loss within the range. • A jury trial took place in September 2009. • The jury reached a verdict on September 24, 2009, and a judgment was ordered in favor of W. The judgment required M to pay W $18.5 million. • In November 2009, M filed a Notice of Appeal with the Court of Appeals. • In December 2010, the Court of Appeals issued a ruling in favor of M’s appeal and reversed the lower court’s ruling on the matter. This meant that the Court of Appeals overturned the jury verdict and the $18.5 million judgment against M. • On January 6, 2011, W filed a petition for a re-hearing before the same panel of appellate judges against the reversal of ruling by Court of Appeals. • On February 10, 2011, the appellate judges declined the petition for a re-hearing. • On February 28, 2011, management of M determined this matter was closed upon discussions with in-house legal counsel. Required: 1. For the year-end December 31, 2007, financial statements, what amount should M record as a liability? 2. For the year-end December 31, 2009, financial statements, should M adjust its liability? If so, what amount should be recorded; and should the amount of the adjustment be considered a 2009 event or a prior period adjustment? 3. Should M record the reduction of the previously recorded loss contingency in 2010 (upon the Court of

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