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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Contingent liabilities

Several months ago, Ayers Industries Int. experienced a hazardous materials spill at one of its plants. As a result, the: Environmental Protection Agency (EPA) fined the company $240,000. The company is contesting the fine. In addition, an employee is seeking $220,000 in damages related to the spill. Finally, a homeowner has sued the company for $310,000. The: homeowner lives 35 miles from the plant but believes that the incident has reduced the home's resale value by $310,000.

Ayers' legal counsel believes that it is probable that the EPA fine will stand. In addition, counsel indicates that an out-of-court settlement of $125,000 has recently been reached with the employee. The final prepares will be signed next week. Counsel believes that the homeowner’s case is much weaker and will be decided in favor of Ayers. Other litigation related to the spill is possible, but the damage amounts are uncertain.

  1. a. Journalize the contingent liabilities associated with the hazardous materials spill. Use the account “Damage Awards and Fines” to recognize the expense for the period.
  2. b. Prepare a note disclosure relating to this incident.

A.

To determine

Contingent liability:  It is a potential liability of a company that depends on a future event. It is the result of an uncertain event. For paying a contingent liability, some event should happen in the future. The recording of contingent liability is based on the following likelihoods of the event occur in future:

  • Remote
  • Reasonably possible
  • Probable

To Journalize: The contingent liabilities.

Explanation

  • Damage awards and fines is an expense and it decreases the equity value. So, debit it by $365,000.
  • EPA Fines Payable is a liability and it is increased...

B.

To determine

To prepare: a note disclosure related to the incident.

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