Each of the following situations represent a situation at a business. 

1. Freedom estimates that $700,000 of its accounts receivable will prove to be uncollectible. 

2. The company’s president is in poor health and has previously suffered two heart attacks. 

3. As with any airline, Freedom faces the risk that a future airplane crash could cause considerable loss. 

4. Freedom is being sued for $2 million for failing to adequately provide alternative service for passengers whose reservations were canceled as a result of the airline’s overbooking certain flights. This suit will not be resolved for a year or more. 

INSTRUCTIONS 

a. Discuss each of the following situations, indicating whether the situation is a loss contingency that should be recorded or disclosed in the financial statements of Freedom Airlines. If the situation is not a loss contingency, explain how (if at all) it should be reported in the company’s financial statements. (Assume that all dollar amounts are material.) 

b. Make a general statement that summarizes management’s ethical responsibility regarding reporting loss contingencies in its financial statements.