Several months ago, Reiltz Industries, Inc. experienced a hazardous materials spill at one of its plants. As

Question:

Several months ago, Reiltz Industries, Inc. experienced a hazardous materials spill at one of its plants. As a result, the Environmental Protection Agency (EPA) fined the company $570,000. The company is contesting the fine. In addition, an employee is seeking $560,000 in damages related to the spill. Lastly, a homeowner has sued the company for $364,000.
The homeowner lives 35 miles from the plant, but believes that the incident has reduced the home’s resale value by $364,000.
Reiltz’s legal counsel believes that it is probable that the EPA fine will stand. In addition, counsel indicates that an out-of-court settlement of $238,000 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 Reiltz. Other litigation related to the spill is possible, but the damage amounts are uncertain.
a. Journalize the associated with the hazardous materials spill. Use the account “Damage Awards and Fines” to recognize the expense for the period.
b. Prepare a note disclosure relating to this incident.

Contingent liabilities
A contingent liability is an obligation of business related to an uncertain future event. The business must record it in its financial statements if the amount can be reliably estimated and it is probable that amount will be paid by business as a...