Several months ago, Jones Company experienced a spill of hazardous materials into the White River from one of its plants. As a result, the Environmental Protection Agency (EPA) fined the company $405,000. The company contested the fine. In addition, an employee is seeking $180,000 damages related to the spill. Finally, a homeowner has sued the company for $260,000. Although the homeowner lives 30 miles downstream from the plant, he believes that the spill has reduced his home’s resale value by $260,000. Jones’ legal counsel believes the following will happen in relationship to these incidents: (a) It is probable that the EPA fine will stand. (b) An out-of-court settlement for $165,000 has recently been reached with the employee, with the final papers to be signed next week. (c) Counsel believes that the homeowner’s case is weak and will be decided in favor of Jones Company. (d) Other litigation related to the spill is possible, but the damage amounts are uncertain. (1) Based on this information, journalize the contingent liabilities associated with the spill. Use the account “Damage Awards and Fines” to recognize the expense for the period. (2) Prepare any note disclosure related to the spill.

Individual Income Taxes

43rd Edition

ISBN:9780357109731

Author:Hoffman

Publisher:Hoffman

Chapter6: Deductions And Losses: In General

Section: Chapter Questions

Problem 1RP

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Several months ago, Jones Company experienced a spill of hazardous materials into the White River from one of its plants. As a result, the Environmental Protection Agency (EPA) fined the company $405,000. The company contested the fine. In addition, an employee is seeking $180,000 damages related to the spill. Finally, a homeowner has sued the company for $260,000. Although the homeowner lives 30 miles downstream from the plant, he believes that the spill has reduced his home’s resale value by $260,000.

Jones’ legal counsel believes the following will happen in relationship to these incidents:

(a)	It is probable that the EPA fine will stand.
(b)	An out-of-court settlement for $165,000 has recently been reached with the employee, with the final papers to be signed next week.
(c)	Counsel believes that the homeowner’s case is weak and will be decided in favor of Jones Company.
(d)	Other litigation related to the spill is possible, but the damage amounts are uncertain.

(1)	Based on this information, journalize the contingent liabilities associated with the spill. Use the account “Damage Awards and Fines” to recognize the expense for the period.
(2)	Prepare any note disclosure related to the spill.

Definition Definition Costs that a business is responsible for paying, should a particular event potentially occur in the future. Also called a potential liability, a contingent liability is generally recorded only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly. The Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Principles (IFRS) make it mandatory for the companies to record any contingent liability taking the principles of full disclosure, materiality, and prudence into consideration.

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