Intermediate Accounting Problem 13-13

Topics: Balance sheet, Asset, Accounting equation Pages: 3 (790 words) Published: March 26, 2012
| PROBLEM 13-13| |

(a)
1.| Loss from Uninsured Accident| 225,000| |
| Liability for Uninsured Accident| | 225,000| | | | |
2.| Loss Due to Environmental Clean-up| 500,000| |
| Liability for Environmental Clean-up| | 500,000| | | | |
3.| Loss Due to Expropriation| 2,245,000| |
| Allowance for Expropriation| | 2,245,000|
| [$5,725,000 – (40% X $8,700,000)]| | |
| | | |
4.| No entry required.| | |

(b)
1.| 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 likely that a liability had been incurred at the date of the financial statements and (ii) the amount is reasonably estimable. That is, the occurrence of the uninsured accidents during the year plus the outstanding injury suits and the legal counsel’s estimate of probable loss required recognition of a loss contingency.No journal entry is recorded in the case of the $60,000 injury suit since it is considered unlikely that a liability has been incurred at the date of the financial statements. If the amount were considered material it would be desirable to disclose the existence of the lawsuit in the notes to the financial statements.|

PROBLEM 13-13 (Continued)

2.| A loss and a liability have been recorded because information is available prior to the issuance of the financial statements that indicates it is likely that a liability had been incurred at the date of the financial statements. Where a range of possible amounts is determined and no one amount within the range is more likely than another, the bottom of the range is usually accrued with the amount of the remaining exposure disclosed in the notes. | 3.| An entry to record a loss and establish an allowance due to threat of expropriation is necessary because the expropriation is imminent as evidenced by the foreign...
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