Question

Each of the following situations represent a situation at a business.

Freedom estimates that $700,000 of its accounts receivable will prove to be uncollectible.

The company’s president is in poor health and has previously suffered two heart attacks.

As with any airline, Freedom faces the risk that a future airplane crash could cause considerable loss.

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

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.)

Make a general statement that summarizes management’s ethical responsibility regarding reporting loss contingencies in its financial statements.

Answer 1

Answer:

a.

1. The carrier organization has evaluated that the $700,000 of its record receivable will turn out to be uncollectible. It is the sensible sum however it isn't going under the misfortune possibilities. It is the receivable sum which organization will get in future. It ought to be accounted for in the budgetary statement's monetary record of the organization.

2. The organization's leader is in poor condition heath condition so it is a misfortune possibility for the organization however it didn't give reasonable measure of misfortune which may come in future. It is recorded in notes of the budgetary articulation without acknowledgment.

3. As organization may confront an extensive misfortune in future however the sum isn't resolved in esteem. It is the misfortune possibility and it ought to be uncovered in the money related proclamation.

4. It is the circumstance of misfortune possibility and the sum is likewise given thus, this sum is unveiled in the notes of the asset report and it isn't recorded.

b. The administration moral duty recording the misfortune possibilities in its money related articulation is as per the following:

Misfortune possibilities ought to be genuinely recorded and detailed as it has the primary effect on the money related proclamations of the organization. Organization ought to reveal clear data with respect to the misfortune possibilities on the grounds that numerous financial specialists are searching for the reasonable data in order to put resources into the organization. On the off chance that the data's are concealed it might make the market emergencies plans the future loss of individual and additionally organizations as well.