Hamilton Airlines is faced with two situations that need to be resolved before the financial statements for the company's year ended December 31, 2017 can be issued.
1. The airline is being sued for $4 million for an injury caused to a child as a result of alleged negligence while the child was visiting the airline maintenance hangar in March 2017. The suit was filed in July 2017. Hamilton's lawyer states that it is likely that the airline will lose the suit and be found liable for a judgement costing anywhere from $400,000 to $2 million. However, the lawyer states that the most probable judgement is $800,000.
2. On November 24, 2017, 26 passengers on Flight No. 901 were injured upon landing when the plane skidded off the runway. On January 11, 2018, personal injury suits for damages totalling $5 million were filed against the air- line by 18 injured passengers. The airline carries no insurance. Legal counsel has studied each suit and advised that it can reasonably expect to pay 60% of the damages claimed.
Instructions
(a) Prepare any disclosures and journal entries for the airline required by
(1) ASPE, and
(2) IFRS in the preparation of the December 31, 2017 financial statements.
(b) Ignoring the 2017 accidents, what liability due to the risk of loss from lack of insurance coverage should Hamilton Airlines record or disclose? During the past decade, Hamilton Airlines has experienced at least one accident per year and incurred average damages of $3.2 million. Discuss fully.
(c) Your are the manager at Hamilton Airlines who is assessing the two lawsuit cases for financial reporting purposes. Describe how you
(1) arrived at the assessment of the likelihood of the outcome in each case, and
(2) measured the amount of the probable judgement.