Several months ago, Ayers Industries Inc. experienced a hazardous materials spil
ID: 2448623 • Letter: S
Question
Several months ago, Ayers Industries Inc. 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. Lastly, 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 papers 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.
B. Prepare a note disclosure relating to this incident.
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 selector 1
$530,000
$240,000
$125,000
$365,000
, which the company is contesting in court. Although the company selector 2
does
does not
admit fault, legal counsel believes that the fine payment is selector 3
remote
probable
reasonably possible
. In addition, an employee has sued the company. A selector 4
$125,000
$365,000
$240,000
$530,000
out-of-court settlement has been reached with the employee. The EPA fine and out-of-court settlement have been recognized as selector 5
revenue
an expense
a current asset
for the period. There is one other outstanding lawsuit related to this incident. Counsel selector 6
does
does not
believe that the lawsuit has merit. Other lawsuits and unknown liabilities may arise from this incident.
Points:
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Explanation
Required: A. On December 31, journalize the contingent liabilities associated with the hazardous materials spill. Use the account “Damage Awards and Fines” to recognize the expense for the period. Refer to the Chart of Accounts for exact wording of account titles.B. Prepare a note disclosure relating to this incident.
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 selector 1
$530,000
$240,000
$125,000
$365,000
, which the company is contesting in court. Although the company selector 2
does
does not
admit fault, legal counsel believes that the fine payment is selector 3
remote
probable
reasonably possible
. In addition, an employee has sued the company. A selector 4
$125,000
$365,000
$240,000
$530,000
out-of-court settlement has been reached with the employee. The EPA fine and out-of-court settlement have been recognized as selector 5
revenue
an expense
a current asset
for the period. There is one other outstanding lawsuit related to this incident. Counsel selector 6
does
does not
believe that the lawsuit has merit. Other lawsuits and unknown liabilities may arise from this incident.
Points:
Feedback
Check My Work
Explanation
CHART OF ACCOUNTS Ayers Industries Inc. General Ledger ASSETS 110 Cash 111 Accounts Receivable 112 Interest Receivable 113 Notes Receivable 115 Merchandise Inventory 116 Supplies 118 Prepaid Insurance 120 Land 123 Building 124 Accumulated Depreciation-Building 125 Office Equipment 126 Accumulated Depreciation-Office Equipment LIABILITIES 210 Accounts Payable 213 Interest Payable 214 Notes Payable 215 Salaries Payable 216 Social Security Tax Payable 217 Medicare Tax Payable 218 Employees Federal Income Tax Payable 219 Employees State Income Tax Payable 221 Retirement Savings Deductions Payable 224 Federal Unemployment Tax Payable 225 State Unemployment Tax Payable 226 Vacation Pay Payable 227 Unfunded Pension Liability 228 Litigation Claims Payable 229 EPA Fines Payable EQUITY 310 Owner, Capital 311 Owner, Drawing 312 Income Summary REVENUE 410 Sales 610 Interest Revenue EXPENSES 510 Cost of Merchandise Sold 520 Salaries Expense 524 Depreciation Expense-Building 525 Delivery Expense 526 Repairs Expense 529 Selling Expenses 531 Rent Expense 532 Depreciation Expense-Office Equipment 533 Insurance Expense 534 Supplies Expense 535 Payroll Tax Expense 536 Vacation Pay Expense 537 Pension Expense 538 Cash Short and Over 539 Product Warranty Expense 540 Miscellaneous Expense 710 Interest Expense 720 Damage Awards and FinesExplanation / Answer
1 ) 720 damge awards and fines .... a/c dr 365000
To 229 EPA fines payable a/c 240000
To 228 Litigation Claims Payable a/c 125000
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