On February 1, 2013, one of the huge storage tanks of Viking Manufacturing Compa
ID: 2363586 • Letter: O
Question
On February 1, 2013, 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, 2013 (when the December 31, 2012, 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, 2012.Explanation / Answer
Based on the scenario description, this is going to be a loss contingency with probable likelihood of loss (p. 736). The storage tank exploded and caused damage to houses and buildings within a one mile radius and the company is definitely liable for the damages. The expectation for liability is high.
Financial statements are supposed to provide the most useful information about an entity to investors and the general public. Based on the scenario, the company had not yet published its financial statements as of February 15th and the accident happened on February 1st. I believe that because the financial statement is for the prior year, the company should make note of the expected liability but does not need to expense the charge.
In the 2013 financial statement they will definitely need to accrue the estimated loss by a charge to expense because they will be able to determine a reasonable estimate of loss and they already know that they have incurred a liability.
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