Mercury Rising Inc. manufactures thermometers for use in labs. Management has prepared financial statements for the year ended 2011 for review by the auditors. The audit team has questioned several items in the financial statements and has asked for your advice concerning the proper treatment of these items. Each of the items being questioned follows.
(a) In November 2011, attorneys for current and former employees of Mercury Rising Inc. filed a class action lawsuit, alleging that exposure to mercury has caused significant medical problems. Attorneys for Mercury Rising Inc. are uncertain as to the outcome of the case. However, similar lawsuits against other firms in the mercury industry have resulted in significant payments by the employer.
(b) On January 12, 2012, a fire at a production facility damaged a number of adjacent buildings (owned by other businesses). Mercury’s insurance policy does not cover damage to the property of others. Insurance companies for those other businesses have billed Mercury for the estimated cost of $5.3 million required to restore the damaged buildings.
(c) One of Mercury’s production plants is located on the shores of Lake Hogwarts. The lake has been rising for a number of years, and the company has installed dikes to prevent flooding. The dikes are currently operating at or near capacity. Weather forecasters have predicted that the lake will rise another eight inches this coming summer. If this occurs, significant damage will likely result from stressing the dikes beyond capacity.
(d) A national magazine printed an article regarding the dangers of mercury and specifically named Mercury Rising Inc. as a “killer of innocent victims.” Attorneys for Mercury filed suit for libel and were awarded $2.1 million in damages on December 16, 2011. The magazine has indicated it would appeal the verdict.
Instructions:
Determine how each of these events should be disclosed in the financial statements of Mercury Rising Inc. for the year ended December 31, 2011. Provide support for your position.