1. Merck & Co. included the following footnote in its 2013 annual report:

Environmental Matters

The Company believes that there are no compliance issues associated with applicable environmental laws and regulations that would have a material adverse effect on the Company. The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites. Expenditures for remediation and environmental liabilities were $20 million in 2013, $14 million in 2012 and $25 million in 2011, and are estimated at $117 million in the aggregate for the years 2014 through 2018. These amounts do not consider potential recoveries from other parties. The Company has taken an active role in identifying and providing for these costs and, in managements opinion, the liabilities for all environmental matters, which are probable and reasonably estimable, have been accrued and totaled $213 million at December 31, 2013. Although it is not possible to predict with certainty the outcome of these environmental matters, or the ultimate costs of remediation, management does not believe that any reasonably possible expenditures that may be incurred in excess of the liabilities accrued should exceed $84 million in the aggregate. Management also does not believe that these expenditures should have a material adverse effect on the Companys financial position, results of operations, liquidity or capital resources for any year.

Required:

a. How does Merck account for environmental liabilities that are probable and reasonably estimable? At December 31, 2013, how much were these liabilities?

b. How does Merck account for environmental liabilities that are reasonably possible? At December 31, 2013, how much were these liabilities?

c. The footnote mentions $213 million and $117 million as estimated future expenditures. Explain what each of these amounts represents and why they differ.

d. Use the financial statement effects template below, to record Mercks 2013 remediation and environmental expenditures, assuming that the liability had already been accrued on Mercks books.

Balance Sheet

Income Statement

Transaction

Cash Asset

+

Noncash Assets

=

Liabil- ities

+

Contrib. Capital

+

Earned Capital

Rev-enues

Expen-ses

=

Net Income

2013 remediation and environmental expenditures

=

=

2. Neel Industries recently issued $35 million of 12% coupon bonds, payable semiannually, which mature in 10 years. The bonds were sold for $33,071,761 to yield a 13% annual rate. Use the table below to show the amortization of the discount, interest expense, and the carrying amount of the bonds from issuance till the end of period 4.

	Interest Expense	Interest Paid	Amortization	Discount	Bond Payable
0
1
2
3
4