Question

Contingent Liabilities 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 $550,000. The company is contesting the fine. In addition, an employee is seeking $350,000 in damages related to the spill. Lastly, a homeowner has sued the company for $350,000. The homeowner lives 30 miles from the plant, but believes that the incident has reduced the home's resale value by $350,000. 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 $150,000 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. a. Journalize the contingent liabilities associated with the hazardous materials spill. Use the account "Damage Awards and Fines" to recognize the expense for the period. If an amount box does not require an entry, leave it blank. Damage Awards and Fines EPA Fines Payable Litigation Claims Payable 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 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 $ 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.

Answer 1

a.						Debit	Credit
	Damages,Awards and Fines					700000
	EPA fines payable						550000
	Litigation claims payable						150000
	(Contingent liabilities recorded)
b.	The company experienced a hazardous materials spill at one of it's plants during the previous period
	This spill has resulted in a number of law suits to the company is a party.The Environmental Protection Agency (EPA) has fined the company $ 550000, 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 $ 150000 out-of-court settlement has reached with the employee.
	The EPA fine and out-of-court settlement has recognized as an expense for the period.
	There is one other outstanding lawsuit related to this incident.
	Councel does not believe that the lawsuit has merit.
	Other lawsuits and unknown liabilities may arise from this incident