Asked by Natalie Montalvo on Jun 15, 2024
Verified
Several months ago, Maximilien Company experienced a spill of radioactive materials into the Missouri River from one of its plants. As a result, the Environmental Protection Agency (EPA) fined the company $1,750,000. The company contested the fine. In addition, an employee is seeking $975,000 damages related to the spill. Finally, a homeowner has sued the company for $580,000. Although the homeowner lives 15 miles downstream from the plant, he believes that the spill has reduced his home's resale value by $580,000.Maximilien's 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 $650,000 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 Maximilien Company.(d)Other litigation related to the spill is possible, but the damage amounts are uncertain.(1)Based on this information, prepare the journal entries for the contingent liabilities associated with the spill. Use the account "Environmental 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 or may not become actual liabilities, depending on the outcome of uncertain future events.
Environmental Awards
Recognitions given to individuals, organizations, or businesses for significant contributions to the preservation and sustainability of the environment.
EPA Fine
Penalties imposed by the Environmental Protection Agency for violations of environmental laws and regulations.
- Recognize and journalize contingent liabilities and understand the requirements for note disclosures related to contingencies.
- Understand the implications of environmental liabilities on corporate financial reporting and management.
Verified Answer
MB
Madelyn BerryJun 17, 2024
Final Answer :
(1)Damage Awards and Fines
2,400,000
EPA Fines Payable
1,750,000
Litigation Claims Payable
650,000
Note: The "Environmental Awards and Fines" would be disclosed on the income statement under "Other expenses."
(2)The company experienced a radioactive 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 $1,750,000, 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 $650,000 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.
2,400,000
EPA Fines Payable
1,750,000
Litigation Claims Payable
650,000
Note: The "Environmental Awards and Fines" would be disclosed on the income statement under "Other expenses."
(2)The company experienced a radioactive 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 $1,750,000, 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 $650,000 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
- Recognize and journalize contingent liabilities and understand the requirements for note disclosures related to contingencies.
- Understand the implications of environmental liabilities on corporate financial reporting and management.