Asked by Li-Yun Chang on Jun 27, 2024
Verified
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.
Contingent Liabilities
Potential liabilities that may occur depending on the outcome of a future event or set of circumstances.
Damage Awards
Monetary compensation determined and ordered by a court for losses or injuries suffered as a result of unlawful actions or negligence by another party.
EPA Fine
A penalty imposed by the Environmental Protection Agency for violations of environmental laws or regulations.
- Identify and record contingent liabilities and comprehend the criteria for including note disclosures regarding contingencies.
- Comprehend how environmental responsibilities influence the financial reporting and management of corporations.
Verified Answer
570,000
EPA Fines Payable
405,000
Litigation Claims Payable
165,000
Note: The "damage awards and fines" would be disclosed on the income statement under "Other expenses."
(2)The company experienced a hazardous materials spill at one of its plants during the previous period. This spill has resulted in a number of lawsuits to which the company is a party. The Environmental Protection Agency (EPA) has fined the company $405,000, which the company is contesting in court. Although the company does not admit fault, legal counsel believes that the fine payment is probable. In addition, an employee has sued the company. A $165,000 out-of-court settlement has been reached with the employee. The EPA fine and out-of-court settlement have been recognized as an expense for the period. There is one other outstanding lawsuit related to this incident. Counsel does not believe that the lawsuit has merit. Other lawsuits and unknown liabilities may arise from this incident.
Learning Objectives
- Identify and record contingent liabilities and comprehend the criteria for including note disclosures regarding contingencies.
- Comprehend how environmental responsibilities influence the financial reporting and management of corporations.
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