Riverbed Corporation, in preparation of its December 31, 2017, financial stateme

Question

Riverbed Corporation, in preparation of its December 31, 2017, financial statements, is attempting to determine the proper accounting treatment for each of the following situations.

(a) Prepare the journal entries that should be recorded as of December 31, 2017, to recognize each of the situations above. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

No.

Date

Account Titles and Explanation

Debit

Credit

1. As a result of uninsured accidents during the year, personal injury suits for $343,200 and $60,200 have been filed against the company. It is the judgment of Riverbed’s legal counsel that an unfavorable outcome is unlikely in the $60,200 case but that an unfavorable verdict approximating $233,800 will probably result in the $343,200 case. 2. Riverbed owns a subsidiary in a foreign country that has a book value of $5,611,000 and an estimated fair value of $9,028,000. The foreign government has communicated to Riverbed 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, Riverbed expects to receive 60% of the fair value of its properties as final settlement. 3. Riverbed’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 2017 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 $60,200 to $672,000), management is certain that next year the company will probably not be so fortunate.

Explanation / Answer

As per IAS 37 we need to recognize a provision for point no 1 for first accident as it is a case of present liability as a result of past as a result of past event which is likely to cause a future cash flow and a reliable estimate can be made for the amount.

For point no 3 since the amount and possibility of outflow is remote hence no contingent liability is recognized as per IAS 37.  

Account Titles and Explanation Debit Credit 1 December 31, 2017 Profit & Loss A/c Dr 233800 To Provision for accident claims 233800 2 December 31, 2017 No entry 0 No entry 0 3 December 31, 2017 No entry 0 No entry 0

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