loss contingencies 1

On February 1, 2016, one of the huge storage tanks of Viking Manufacturing Company exploded.

Windows in houses and other buildings within a one-mile radius of the explosion were severely damaged, and a number of people were injured. As of February 15, 2016 (when the December 31, 2015, financial statements were completed and sent to the publisher for printing and public distribution), no suits had been filed or claims asserted against the company as a consequence of the explosion. The company fully anticipates that suits will be filed and claims asserted for injuries and damages. Because the casualty was uninsured and the company considered at fault, Viking Manufacturing will have to cover the damages from its own resources.

Instructions

Discuss fully the accounting treatment and disclosures that should be accorded the casualty and related contingent losses in the financial statements dated December 31, 2015.

Just do response each posted # 1 to 3 down below only

Posted 1

Viking Manufacturing Company should make note of any potential suits, claims, and damages in the financial statement for December 31, 2015. Even though there aren’t any claims filed to date at the time of the financial statements release, Viking anticipates that there will be. To report a loss and a liability in the financial statements, the cause for litigation must have occurred on or before the date of the financial statements. It does not matter that the company became aware of the existence or possibility of the lawsuit or claims after the date of the financial statements but before issuing them. (Kieso, Weygant, & Warfield, 2016)

Since this happened in February of 2016 a loss contingency needs to be in the December 31, 2016 financial statements. At this time Viking would be able to better assess the damages to the Vikings property, potential civil property expenses and suits that Viking will incur since they didn’t have casualty insurance.

References

Kieso, D. E., Waygandt, J. J., & Warfield, T. D. (2016). Intermediate Accounting; 16th Edition.Various: John Wiley & Sons, Inc.

Posted 2

Hi Dr. Riley and class,

When businesses experiences incidents like this one, loss related to risk of damages of property by fire, explosion or other hazards are not accrued. “With respect to unfiled suits and unasserted claims and assessments, a company must determine (1) the degree of probability that a suit may be filed or a claim or assessment may be asserted, and (2) the probability of an unfavorable outcome”, (Kieso, D., et al., pg. 676). The likelihood of the loss occurring is divided into 3 categories: probable, reasonably possible and remote. Other factors for determining whether to record a liability would be the time period between the accident and legal action taken, probability of an unfavorable outcome and being able to make a fair estimate of the possible loss.I believe this occurrence to be reasonably possible. According to accounting expert Harold Averkamp,“a loss contingency which is possiblebut not probable, or the amount cannot be estimated, will not be recorded in the accounts. Rather, it will be disclosed in the notes to the financial statements”, (AccoutingCoach., 2004-2019). So, in December 2015, Viking Manufacturing should not yet record a loss involving any legal action. “To report a loss and a liability in the financial statements, the cause for litigation must have occurred on or before the date of the financial statements”, (Kieso, D., et al., pg. 675).

Posted 3

Hello All,

Viking Manufacturing Company being responsible for the explosion would have to estimate how much damage was done due the explosion within the radius. While it is hard to determine the dollar amount for the damages they would have to give it their best estimate and then give or take from that number. In this situation the company should expect a high liability claim coming their way. The company should have included something about this explosion in their financial statement. Although they will not know the exact loss, but by not including anything at all this makes their financial statement for 2015 misleading to their clients and investors. For their 2016 financial statement they would definitely have to include their loss since by then they will most likely start seeing claims coming in for the loss people suffered due to the explosion.