Question

On May 20, 2018 a passenger was injured while disembarking one of the company’s aeroplane. This was partially the result of his own negligence. The passenger sued Raleigh Airlines Ltd. for $1,000,000. Raleigh’s legal counsel believes it is possible but not probable that the outcome of the suit will be unfavourable and that the settlement would cost the company from $500,000 to $800,000.

Discuss the proper accounting treatment, including any required disclosure for the situation. Give the rationale for your answer.

Answer 1

In the above case, The following points are to be noted:

1. There was a partial negligence of passenger

2. Raleigh's legal counsel believes that it is possible but not probable that the outcome of the suit will be unfavorable

3. The amount of settlement is also not clearly confirmed.

On the basis of the above points it can be concluded that the liability is a Contingent Liability. Contingent Liabilities are those liabilities who will be our actual liability in case of some future uncertain event. In our case, it is not sure that Raleigh will have to pay to the passenger as it depends upon the result of court's decision.

Contingent liabilities are not shown in the financial statements. they are shown at the footnote of the Balance sheet by making a disclosure for the shareholders.

Hope it helps. In Case of any doubts or Issues , please comment below

Hence, in our case also Raleigh will have to show the above estimated liability in the disclosure to the footnote of Balance sheet.