Question

Vaughn Corporation, in preparation of its December 31, 2020, 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 $334,300 and $63,400 have been filed against the company. It is the judgment of Vaughn’s legal counsel that an unfavorable outcome is unlikely in the $63,400 case but that an unfavorable verdict approximating $275,000 will probably result in the $334,300 case.
2.		Vaughn owns a subsidiary in a foreign country that has a book value of $6,161,000 and an estimated fair value of $8,992,800. The foreign government has communicated to Vaughn its intention to expropriate the assets and business of all foreign investors. On the basis of settlements other firms have received from this same country, Vaughn expects to receive 40% of the fair value of its properties as final settlement.
3.		Vaughn’s chemical product division consisting of five plants is uninsurable because of the special risk of injury to employees and losses due to fire and explosion. The year 2020 is considered one of the safest (luckiest) in the division’s history because no loss due to injury or casualty was suffered. Having suffered an average of three casualties a year during the rest of the past decade (ranging from $63,400 to $670,000), management is certain that next year the company will probably not be so fortunate.

(a) Prepare the journal entries that should be recorded as of December 31, 2020, to recognize each of the situations above. (If no entry is required, select "No Entry" for the account titles and enter for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) No. Account Titles and Explanation Debit Credit Date December 31, 2020 1. 2. December 31, 2020 3. December 31, 2020

Answer 1

S.No.	Date	Account title and explanation	Debit	Credit
1	December 31,2020	Lawsuit loss	$275,000
		To Lawsuit contingent liability		$275,000
		( Being a loss and a liability have been recorded in the first case, because (1) information is available prior to the issuance of the financial statements that indicates it is probable that a liability had been incurred at the date of the financial statements and (2) the amount is reasonably estimate .
2	December 31,2020	Loss from Expropriation	$25,63,880
		To Allowance for Expropriation ($61,61,000 - (40% * $8,992,800)		$25,63,880
		(Being , because the expropriation is imminent as evidenced by the foreign government communicated intent to expropriate and the prior settlement for properties already expropriated.
3	December 31,2020	No entry . (As the reasonable value of estimated loss is not determined)