In the late 1980s, DuPont acknowledged that one of its products, a fungicide called Benlate, seemed to be at fault for damage to millions of acres of nurseries and fruit plantations. In 1992, after paying approximately $510 million in claims, the company concluded its product was not responsible for the damage and halted further damage payments. This set the stage for over 700 lawsuits. In the notes to its 2004 financial statements, DuPont disclosed the following about the Benlate lawsuits:
In 1991, DuPont began receiving claims by growers that use of Benlate® 50DF fungicide had caused crop damage. DuPont has since been served with several hundred lawsuits, most of which have been disposed of through trial, dismissal or settlement. . . . Twenty-one of the 93 cases pending against the company at December 31,2004, were filed by growers who allege plant damage from using Benlate® 50DF and, in some cases, Benlate® WP. Forty-one of the pending cases seek to reopen settlements with the company by alleging that the company committed fraud and misconduct, as well as violations of federal and state racketeering laws. Three of the pending cases include claims for alleged personal injury arising from exposure to Benlate® 50DF and/or Benlate®WP. Twenty-eight of the pending cases include claims for alleged damage to shrimping operations from Benlate® OD. . . . DuPont does not believe that Benlate® caused the damages alleged in these cases and denies the allegations of fraud and misconduct. DuPont continues to defend itself in ongoing matters.
1. In regard to the amount of the recognized liability for the Benlate lawsuits, DuPont discloses that the liability “is not reduced by the amounts of any expected insurance recoveries.”Why isn’t the amount of the liability reduced by the amount of expected insurance recoveries?
2. In regard to the recognition of liabilities for environmental cleanup, DuPont discloses the following: “Accrued liabilities do not include claims against third parties and are not discounted.” Does this policy increase or decrease the recognized amounts of the recorded liabilities? Explain.
3. Assume that DuPont spends $10 million cash on an environmental project. What is the appropriate journal entry, assuming that no liability for the environmental project had previously been recognized?