Problem 13-11
Problem 13-11
Question 1
a)
As seen in the journal entries above Polska has incurred a loss from the uninsured accident and a liability also. This is due to, firstly a reasonable estimate of the amount has been given and secondly before the financial records were issued the information was already known indicating that the financial obligation had been sustained at the date of the financial statements. In other words, the outstanding injury suits, the happening of the uninsured accidents during the year and the legal counsels’ estimates of possible loss needed acknowledgement of a loss contingency.
Question 2
b) From the entries above an allowance for expropriation and a loss from expropriation are recorded. This is essential because expropriation is inevitable since the foreign government’s intentions for expropriation are properly communicated so as the earlier settlements for properties that had been already expropriated. From this it is evident to make a reasonable estimate of the quantity of possible loss arising from properties damage as at the balance sheet date.
The loss amount is calculated from the difference between the book value and the amount which is expected as compensation. The involved assets, at expropriation will be cancelled against the expropriation allowance account.
In this case some specific assets were damaged hence a valuation account instead of a liability account plus the total worth of the properties involved has reduced which is a more accurate demonstration on the balance sheet, that is of the net worth(realizability) of the assets. Writing off the assets at this juncture may not be prudent since the determination of all of the particular assets involved is hard and also the assets are still yet to be expropriated.
Question 3
Although Polska’s chemical products department is highly risky in relation to injuries of employees and has sustained recurring losses in its past, none of its assets have been damaged nor any liability sustained and also no reasonable estimate has been given as at the date of the balance sheet, hence no need to recognize this situation in the criteria of a loss contingency. Since there are no deaths or accidents to people nor there is no proof of any property damage before issuing of the financial records there is no need to disclose a loss contingency.
The lack of insurance, does not by itself lead to property damage or casualties, also the expectation that accidents or property (asset) damage will occur even if the amount can be reasonably estimated, does not need the asset or liability to be recorded. So in order to record a loss contingency, the reason for the loss or legal action must have taken place on or before the date of the financial records and the quantity of loss must be estimated realistically. If either one or both of the conditions for the loss eventuality are not fulfilled and there is a high chance that an asset may have been damaged or a liability knowledgeable, or, it is credible that a claim will be declared and there is a realistic probability that a claim will be declared and there is a sensible chance of a negative result, then disclosure will be needed.
