Question

Several months ago, Ayers Industrial Inc. experienced a hazardous material spill at one of its plants. As a result, the Environmental protection Agency (EAP) fined the company $450,000. The company is contesting the fine. In addition, an employee is seeking $420,000 in damages related to the spill. Finally, a homeowner has sued the company for $280,000. The homeowner lives 30 miles from the plant but believes that the incident has reduced the home's resale value by $280,000. 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 $180,000 has recently been reached with the employee. The final papers will be signed next week. Counsel believes that 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. a. Journalize the contingent liabillities associated with the hazardous material spill. Use the account "Damage Awards and fines" to recognize the expense for the period. If an amount box.does not require an entry, ;eave it blank. b. The note disclosure would - a statement that the EPA fine is probable and would - a statement about the homeowner lawsuit

Answer 1

Answer:-

Explanation :-

(a) entry

Date	account titles and explanation	debit	credit
	Damage awards and fines	630000
	EPA fines payable		450000
	Litigation claims payable		180000
	(To record contingent liabilities)

(b)

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 $450,000, 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 $180,000 out-ofcourt settlement has been reached with the employee. The EPA fine and out-ofcourt 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.