Last month, a $2,625,000 transformer that SML Inc. had supplied to a customer caught fire and

was destrexed SML Inc. believes the fire was caused by a faulty component that is unique to this

transformer and sent engineers to the site. The engineers estimated that the costs to repair the

damage is $3,500,000.

1. Explain how this would keshawn on SML Inc.'s financial statements at year-end.

2. Assume that instead of knowing the fire was caused by a faulty component, the engineers

and SML Inc. were not able to determine the cause of the fire. Explain how this would be

shown on SML Inc.'s financial statements at year-end.

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