Several months ago, Ayers Industries Inc. experienced a hazardous materials spil
ID: 2454165 • 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 $246,000. The company is contesting the fine. In addition, an employee is seeking $207,000 in damages related to the spill. Lastly, a homeowner has sued the company for $322,000. The homeowner lives 35 miles from the plant but believes that the incident has reduced the home’s resale value by $322,000. 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 $120,000 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.
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.
Explanation / Answer
Solution:
(A). Journalize the Contingent Liabilities:
Legal Counsel Expencess 2,46,000
Accrued Liabilities 2,46,000
(2). Suied Amount:
Suied Expences 3,22,000
Accured Liabilities 3,22,000
(3). Resale:
Cash 3,22,000
Sales 3,22,000
(3). Legal Counsel Expencess 1,20,000
Accrued Liabilities 1,20,000
(4). Accrued Liabilities 1,20,000
Cash 1,20,000
(B). Prepare a Note of this Incident Report:
Environmental Protection Agency 2,46,000
Employee is Seeking 207,000
Sued the Company 322,000
Resale value 322,000
Out-of-Court settlement 120,000
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