Question

(Loss Contingencies: Entries and Essay) On November 24, 2017, 26 passengers on Windsor Airlines Flight No. 901 were injured upon landing when the plane skidded off the runway. Personal injury suits for damages totalling \(9,000,000 were filed on January 11, 2018, against the airline by 18 injured passengers. The airline carries no insurance. Legal counsel has studied each suit and advised Windsor that it can reasonably expect to pay 60% of the damages claimed. The financial statements for the year ended December 31, 2017, were issued February 27, 2018.

Instructions

(a) Prepare any disclosures and journal entries required by the airline in preparation of the December 31, 2017, financial statements.

(b) Ignoring the November 24, 2017, accident, what liability due to the risk of loss from lack of insurance coverage should Windsor Airlines record or disclose? During the past decade, the company has experienced at least one accident per year and incurred average damages of \)3,200,000. Discuss fully.

Short answer

(a) The journal entry and notes to financial statements are recorded in Step 1.

(b) The company is not required to report any liability, as loss is not probable and reasonably estimated.

Step-by-step solution

(a) Calculation of warranty expense

Date	Accounts and Explanations	Debit	Credit
Dec.31,2017	Lawsuit Loss ($9,000,000 x 60%)	$5,400,000
	Lawsuit Liability		$5,400,000
	(To record lawsuit liability)

Notes to the Financial Statements:

The company is a defendant in the suit of personal injury of $9,000,000 that occurred due to an accident of a plane arising due to sipping of the plane on the runway. The legal counsel has estimated the lawsuit liability of $5,400,000, which will be finally paid as a claim.

(b) Reporting of liability

No liability will be recorded for the loss due to the absence of insurance coverage for the potential losses in the future. As per the GAAP, the company is not required to establish the liability for the expected loss of injury in the future, even in the case the loss amount is reasonably estimated. The future losses should be probable and reasonably estimated so as to report them as a liability in the financial statements.