Discuss each of the following situations, indicating whether the situation is a loss contingency
that should be recorded or disclosed in the financial statements of Aztec Airlines. If the situation
is not a loss contingency, explain how (if at all) it should be reported in the company’s financial
statements. (Assume that all dollar amounts are material.)
a. 1. Aztec estimates that $700,000 of its accounts receivable will prove to be uncollectible.
2. The company’s president is in poor health and has previously suffered two heart attacks.
3. As with any airline, Aztec faces the risk that a future airplane crash could cause consider-
4. Aztec is being sued for $10 million for failing to adequately provide for passengers
whose reservations were canceled as a result of the airline’s overbooking certain flights.
This suit will not be resolved for a year or more.
b. Make a general statement that summarizes management’s ethical responsibility regarding
reporting loss contingencies in its financial statements.