On January 08, 2009, 40 passengers on Fayett Airlines Flight No. 18 were injured upon landing when the plane skidded off the runway. Personal injury suits for damages totaling $10,000,000 were filed on January 11, 2011, against the airline by 25 injured passengers. The airline carries no insurance. Legal counsel has studied each suit and advised Buffett Airlines that it can reasonably expect to pay 50% of damages claimed. The financial statements for the year ended December 31, 2009, were issued February 27, 20110.
Instructions:
Q1. Prepare any disclosures and journal entries required by the airline in preparation of the December 31, 2010, financial statements.
Date Accounts Debit Credit
Q2. Ignoring the January 08, 2009, accident; during the past decade Fayett Airlines has experienced at least one accident per year and incurred average damages of $4,500,000. What liability due to the risk of loss from lack of insurance coverage should Buffet Airlines record or disclose? Discuss the appropriate treatment in the financial statements and related footnotes.