Southern Outpost Co. has several contingent liabilities at December 31, 2011. The auditor obtained the following brief description of each liability:
(a) In May 2010, Southern Outpost became involved in litigation. In December 2011, the court assessed a judgment for $600,000 against Southern. Southern is appealing the amount of the judgment. Its attorneys believe it is probable that they can reduce the assessment on appeal by 50%. Southern has made no entries pending completion of the appeal process, which is expected to take at least a year.
(b) In July 2011, Duval County brought action against Southern for polluting the St. Johns River with its waste products. It is reasonably possible that Duval County will be successful, but the amount of damages Southern might have to pay should not exceed $280,000. Southern has made no entry to reflect the possible loss.
(c) Southern Outpost has signed as guarantor for a $70,000 loan by Guaranty Bank to Northern Supply Inc., a principal supplier to Southern. At this time, there is a only a remote likelihood that Southern Outpost will have to make payments on behalf of Northern Supply.
Instructions:
1. What amount should be reported as a liability on the December 31, 2011, balance sheet for each of these items?
2. What note disclosure should be included as part of the balance sheet for each of these items?
3. Prepare the journal entries necessary to adjust Southern’s books to reflect your answers in (1) and (2).