Question

4. Starfish Corporation, in preparation of its December 31, 2017, financial statements, is attempting to determine the proper accounting treatment for each of the following situations. 1. As a result of uninsured accidents during the year, personal injury suits for $261,000 and $697,000 have been filed against the company. It is the judgment of Starfish's legal counsel that an unfavorable outcome is unlikely in the $261,000 case but that an unfavorable verdict approximating $410,000 will probably result in the $697,000 case. 2. Starfish's deep sea exploration division consisting of operations in the Marina Trench is uninsurable because of the special risk of injury to employees and losses due to high pressure. The year 2017 is considered one of tipesafest (luckiest) in the division's history because no loss due to injury or casualty was suffered. Having suffered an average of two casualties a year during the rest of the past decade (ranging from $25,000 to $1,000,000), management is certain that next year the company will probably not be so fortunate. 3. Starfish Corporation owns a subsidiary in a foreign country that has a book value of $21,600,000 and an estimated fair value of $30,890,000. The foreign government has communicated to Starfish its intention to expropriate the assets and business of all foreign investors. On the basis of settlements other firms have received from this same

Answer 1

Debit Credit Date Account Titles and Explantions 2017 1 Dec. 31 Lawsuit loss Lawsuit contingent liabilities (To record liability for uninsured accidents) $410,000 $410,000 2 Dec. 31 No entry (As the reasonable value of estimeted loss is not determined) $3,066,000 3 Dec. 31 Loss from Expropriation [$21.600.000 - 60% x $30,890.000)] Allowance for Expropriation (To record loss due to Expropriation) $3.066.000