Reference no: EM132734956

Question -

a. On February 1, 2019, one of the huge storage tanks of MS Manufacturing Company exploded. Windows in houses and other buildings within a one-mile radius of the explosion were severely damaged, and a number of people were injured. As of February 15, 2019 (when the December 31, 2018, financial statements were completed and sent to the publisher for printing and public distribution), no suits had been filed or claims asserted against the company as a consequence of the explosion. The company fully anticipates that suits will be filed and claims asserted for injuries and damages. Because the casualty was uninsured and the company considered at fault, Viking Manufacturing will have to cover the damages from its own resources.

Discuss fully the accounting treatment and disclosures that should be accorded the casualty and related contingent losses in the financial statements dated December 31, 2018.

b. Constant Company is being sued for P4, 000,000 for an injury caused to a child as a result of alleged negligence while the child was visiting the Constant Company plant in March 2018. The suit was filed in July 2018. Constant's lawyer states that it is probable that Constant will lose the suit and be found liable for a judgement costing anywhere from P400, 000 to P2, 000,000. However the lawyer states that the most probable judgement is P1, 000,000.

How should Constant report the suit in its 2018 financial statements. Discuss the rationale for your answer. Include in your disclosures, if any, that should be made in Constant's financial statements.