Question

Polska Corporation, in preparation of its December 31, 2014, 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 $350,000 and $60,000 have been filed against the company. It is the judgment of Polska’s legal counsel that an unfavorable outcome is unlikely in the $60,000 case but that an unfavorable verdict approximating $250,000 will probably result in the $350,000 case.

2. Polska Corporation owns a subsidiary in a foreign country that has a book value of $5,725,000 and an estimated fair value of $9,500,000. The foreign government has communicated to Polska 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, Polska expects to receive 40% of the fair value of its properties as final settlement.

3.

Polska’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 2014 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 $60,000 to $700,000), management is certain that next year the company will probably not be so fortunate.

Answer 1

Solution: Journal Entries Date Account title and explaination 1) Credit $ 2,50,000 Lawsuit Loss Lawsuit Contingent Liabilities A loss and a liability have been recorded in the first case because (i) 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 (ii) the amount is reasonably estimable Loss from Expropriation Allowance for Expropriation ($5,725,000-40% X $9,500,000)] Because, the expropriation is imminent as evidenced by the foreign government's communicated intent to expropriate and the prior settlements for properties already expropriated No Entry - As the reasonable value of estimated loss is not determined. 2) $19,25,000 $19,25,000 3)