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Accounting Treatment for Uninsured Accidents

Roman Co., in preparation of its December 31, 2010, 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 judgement of Roman Co'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) Roman Co. 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 Roman Co. , it's intention to expropriate the assets and business of all foreign investors. On the basis of settlements, other firms have received from this same country, Roman Co. expects to receive 40% of the fair value of it's properties as final settlement.

3) Roman Co.'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 2010 is considered on of the safest 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.

a) Prepare the journal entries that should be recorded as of December 31, 2010, 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.

Solution Preview

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a) Loss from uninsured accidents 250,000
Uninsured accidents liability 250,000

b) Because the amount is reasonably estimated and has been reported, it is ...

Solution Summary

Roman Co., in preparation of its December 31, 2010, 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 judgement of Roman Co'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) Roman Co. 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 Roman Co. , it's intention to expropriate the assets and business of all foreign investors. On the basis of settlements, other firms have received from this same country, Roman Co. expects to receive 40% of the fair value of it's properties as final settlement.

3) Roman Co.'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 2010 is considered on of the safest 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.

a) Prepare the journal entries that should be recorded as of December 31, 2010, 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.

$2.19