Loss Due To Expropriation Case Summary
| PROBLEM 13-13 | |
(a) 1. | Loss from Uninsured Accident | 225,000 | | | Liability for Uninsured Accident | | 225,000 | | | | | 2. | Loss Due to Environmental Clean-up | 500,000 | | | Liability for Environmental Clean-up | | 500,000 | | | | | 3. | Loss Due to Expropriation | 2,245,000 | | | Allowance for Expropriation | | 2,245,000 | | [$5,725,000 – (40% X $8,700,000)] | | | | | | | 4. | No entry required. | | |
(b) 1. | A loss and a liability have been recorded in the first case because (i) information is available prior to the issuance of the financial statements that indicates it is likely that a liability had been incurred at the date of the financial …show more content…
| An entry to record a loss and establish an allowance due to threat of expropriation is necessary because the expropriation is imminent as evidenced by the foreign government’s communicated intent to expropriate and the prior settlements for properties already expropriated. That is, enough evidence exists to reasonably estimate the amount of the probable loss resulting from impairment of assets at the balance sheet date. The amount of the loss is measured by the amount that the carrying amount of the assets exceeds the expected compensation. At the time the expropriation occurs, the related assets are written off against the allowance account. In this problem, we established a valuation account because certain specific assets were impaired. A valuation account was established rather than a liability account because the net realizable value of the assets affected has decreased. A more appropriate presentation would, therefore, be provided for balance sheet purposes on the realizable value of the assets. It does not seem appropriate at this point to write off the assets involved because it may be difficult to determine all the specific assets involved, and because the assets still have not been expropriated.
(a) 1. | Loss from Uninsured Accident | 225,000 | | | Liability for Uninsured Accident | | 225,000 | | | | | 2. | Loss Due to Environmental Clean-up | 500,000 | | | Liability for Environmental Clean-up | | 500,000 | | | | | 3. | Loss Due to Expropriation | 2,245,000 | | | Allowance for Expropriation | | 2,245,000 | | [$5,725,000 – (40% X $8,700,000)] | | | | | | | 4. | No entry required. | | |
(b) 1. | A loss and a liability have been recorded in the first case because (i) information is available prior to the issuance of the financial statements that indicates it is likely that a liability had been incurred at the date of the financial …show more content…
| An entry to record a loss and establish an allowance due to threat of expropriation is necessary because the expropriation is imminent as evidenced by the foreign government’s communicated intent to expropriate and the prior settlements for properties already expropriated. That is, enough evidence exists to reasonably estimate the amount of the probable loss resulting from impairment of assets at the balance sheet date. The amount of the loss is measured by the amount that the carrying amount of the assets exceeds the expected compensation. At the time the expropriation occurs, the related assets are written off against the allowance account. In this problem, we established a valuation account because certain specific assets were impaired. A valuation account was established rather than a liability account because the net realizable value of the assets affected has decreased. A more appropriate presentation would, therefore, be provided for balance sheet purposes on the realizable value of the assets. It does not seem appropriate at this point to write off the assets involved because it may be difficult to determine all the specific assets involved, and because the assets still have not been expropriated.