Presented below are three independent situations.

1. During 2015, Maverick Inc. became involved in a tax dispute with the government. Maverick’s attorneys have indicated that they believe it is probable that Maverick will lose this dispute. They also believe that Maverick will have to pay the government between €800,000 and €1,400,000. After the 2015 financial statements were issued, the case was settled with the government for €1,200,000.

What amount, if any, should be reported as a liability for this tax dispute as of December 31, 2015?

2. On October 1, 2015, Holmgren Chemical was identified as a potentially responsible party by its Environmental Regulatory Agency. Holmgren’s management along with its counsel have concluded that it is probable that Holmgren will be responsible for damages, and a reasonable estimate of these damages is €6,000,000. Holmgren’s insurance policy of €9,000,000 has a deductible clause of €500,000. How should Holmgren Chemical report this information in its financial statements at December 31, 2015?

3. Shinobi Inc. had a manufacturing plant in Darfur, which was destroyed in the civil war. It is not certain who will compensate Shinobi for this destruction, but Shinobi has been assured by governmental officials that it will receive a definite amount for this plant. The amount of the compensation will be less than the fair value of the plant but more than its book value. How should the compensation be reported in the financial statements of Shinobi Inc.?

Instructions Answer the question at the end of each situation.