In preparing Sahoto Corporation's December 31, 2014 financial statements under ASPE, the vice president, finance, is trying 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 Sahoto's lawyers that an unfavourable outcome is unlikely in the $60,000 case but that an unfavourable verdict for approximately $225,000 is likely in the $350,000 case.
2. In early 2014, Sahoto received notice from the provincial environment ministry that a site the company had been using to dispose of waste was considered toxic, and that Sahoto would be held responsible for its cleanup under provincial legislation. The vice-president, finance, discussed the situation over coffee with the vice-president, engineering. The engineer stated that it would take up to three years to determine the best way to remediate the site and that the cost would be considerable, perhaps as much as $500,000 to $2 million or more. The engineering vice-president advocates recognizing at least the minimum estimate of $500,000 in the current year's financial statements. The financial vice-president advocates just disclosing the situation and the inability to estimate the cost in a note to the financial statements.
3. Sahoto Corporation has a foreign division that has a net carrying amount of $5,725,000 and an estimated fair value of $8.7 million. The foreign government has told Sahoto that it intends to expropriate the assets and business of all foreign investors. Based on settlements that other firms have received from this same country, Sahoto expects to receive 40% of the fair value of its properties as compensation.
4. Sahoto's chemical products division consists of five plants and is uninsurable because of the special risk of injury to employees and losses due to fire and explosion. The year 2014 is considered one of the safest in the division's history because there were no losses due to injury or casualty. 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 not be so fortunate.
Instructions
(a) Prepare the journal entries that should be recorded as at December 31, 2014, 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.
(c) Are there any ethical issues involved in accounting for contingencies?