Question

Each of the following situations represent a situation at a business. 1. Freedom estimates that $700,000 of its accounts receivable will prove to be uncollectible. 2. The company’s president is in poor health and has previously suffered two heart attacks. 3. As with any airline, Freedom faces the risk that a future airplane crash could cause considerable loss. 4. Freedom is being sued for $2 million for failing to adequately provide alternative service for passengers whose reservations were canceled as a result of the airline’s overbooking certain flights. This suit will not be resolved for a year or more. INSTRUCTIONS a. Discuss each of the following situations, indicating whether the situation is a loss contingency that should be recorded or disclosed in the financial statements of Freedom Airlines. If the situation is not a loss contingency, explain how (if at all) it should be reported in the company’s financial statements. (Assume that all dollar amounts are material.) b. Make a general statement that summarizes management’s ethical responsibility regarding reporting loss contingencies in its financial statements.

Answer 1

Situation	Explanation	Account Affected
1. Freedom Estimates $700000 uncollectible Debts	It is an estimate towards the amount of bad debts that can occur. Hence Provision for the same shall be made and recognized in the Financial	Provision for Doubtful Debt A/c
2. The company’s president is in poor health and has previously suffered two heart attacks.	Such extraordinary situation does not require any accounting treatment.	No Account Affected
3. As with any airline, Freedom faces the risk that a future airplane crash could cause considerable loss.	Such situation does notnrequire any accoounting treatment as all business faces such type of risks.	No Account Affected
4. Freedom is being sued for $2 million for failing to adequately provide alternative service for passengers whose reservations were canceled as a result of the airline’s overbooking certain flights. This suit will not be resolved for a year or more.	Such a situation may require adequate Provisioning(or Contingent Liability)and disclosure in Financial. Also a note shall be given in the Board's Report and Annual Report.	Provision shall be made or Shown as Contingent Liability.

General statement that summarizes management’s ethical responsibility regarding reporting loss contingencies in its financial statements:

"It is Management's Responsibility to adequately and appropriately record and disclose all Material Suits, Incidents, Events that may impact the Going Concern of the Business."