On November 24, 2008, 26 passengers on Tom Paris Airlines Flight No. 901 were injured upon landing when the plane skidded off the runway. Personal injury suits for damages totaling $5,000,000 were filed on January 11, 2009, against the airline by 18 injured passengers.

The airline carries no insurance. Legal counsel has studied each suit and advised Paris that it can reasonably expect to pay 60% of the damages claimed. The financial statements for the year ended December 31, 2008, were issued February 27, 2009.

Instructions

(a) Prepare any disclosures and journal entries required by the airline in preparation of the December 31, 2008, financial statements.

(b) Ignoring the Nov. 24, 2008, accident, what liability due to the risk of loss from lack of insurance coverage should Tom Paris 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.