Question

Polska SA, in preparation of its December 31, 2019, 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, it is virtually certain that Polska will 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 2019 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.

4. Polska operates profitably from a factory it has leased. During 2019, Polska decides to relocate these operations to a new factory. The lease of the old factory continues for the next 5 years. The lease cannot be cancelled and the factory cannot be subleased. Polska determines that the cost to settle the old lease is €950,000.

5. Litigation is being pursued for the recovery of €1,300,000 consulting fees on a failed project. The directors believe it is more likely than not that their claim will be successful.

Required

a. Prepare the journal entries that should be recorded as of December 31, 2019, to recognize each of the situations above

b. Indicate what should be reported relative to each situation in the financial statements and accompanying notes. Explain why

Answer 1

Journal Entries
Sl No	Particulars		Debit	Credit
1	Lawsuit Loss A/c	Dr	2,50,000
	To Lawsuit Contingent liabilities A/c			2,50,000
2	Loss from Expropriation A/c	Dr	19,25,000
	To Allowance for Expropriation A/c			19,25,000
	(5725000-{40%*9500000})
3	No Entry - As the reasonable value of
	estimated loss is not determined

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 probable that a liability had been incurred at the date of the financial statements and (ii) the amount is reasonable estimable.

2. An Entry to record a misfortune and build up a recompense because of the danger of seizure is important on the grounds that the confiscation is fast approaching as confirm by the outside government's imparted aim to dispossess and the virtual conviction of a settlement from the administration.

That is, sufficient proof exists to sensibly evaluate the measure of the likely misfortune coming about because of the impedance of advantages at the detailing date. The measure of the misfortune is estimated by the sum that the conveying esteem (book estimation) of the benefits surpasses the normal pay. At the time the seizure happens, the related resources are discounted against the stipend account. In this issue, we built up a valuation account in light of the fact that specific explicit resources were impeded. A valuation account was built up instead of an obligation account on the grounds that the net feasibility of the benefits influenced has diminished. A more appro­priate introduction would, consequently, be given to the articulation of monetary position purposes on the feasibility of the benefits. It doesn't appear to be proper now to discount the advantages included on the grounds that it might be hard to decide all the particular resources included, and in light of the fact that the benefits despite everything have not been seized.

3. Despite the fact that Polska's compound item division is uninsurable because of high hazard and has supported rehashed misfortunes before, as of the announcing date no advantages have been hindered or liabilities brought about nor is a sum sensibly admirable. In this way, this circumstance doesn't fulfill the models for acknowledgment of an unexpected obligation. Likewise, except if a loss has happened or there is some other proof to demonstrate disability of an advantage preceding the issuance of the budget summaries, there is no exposure expected comparative with an unexpected obligation. The nonappearance of protection doesn't of itself bring about the impedance of advantages or the incurrence of liabilities. Anticipated that future wounds should others or harm to the property of others, regardless of whether the sum is sensibly respectable, doesn't require recording a misfortune or an obligation. The reason for misfortune or case or guarantee probably happened on or before the detailing date and the measure of the misfortune must be sensibly admirable all together for an unexpected risk to be recorded. Divulgence is required when either of the rules for an unexpected risk are not fulfilled and there is a sensible chance that an obligation may have been acquired or a benefit weakened, or, it is plausible that a case will be declared and there is a sensible chance of an ominous result.