Contingent Liabilities

Several months ago, Ayers Industries Inc. experienced a hazardous materials spill at one of its plants. As a result, the Environmental Protection Agency (EPA) fined the company $610,000. The company is contesting the fine. In addition, an employee is seeking $460,000 in damages related to the spill. Lastly, a homeowner has sued the company for $380,000. The homeowner lives 30 miles from the plant, but believes that the incident has reduced the home's resale value by $380,000.

Ayers legal counsel believes that it is probable that the EPA fine will stand. In addition, counsel indicates that an out-of-court settlement of $200,000 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 Ayers. Other litigation related to the spill is possible, but the damage amounts are uncertain.

a. Journalize the contingent liabilities associated with the hazardous materials spill. Use the account "Damage Awards and Fines" to recognize the expense for the period. If an amount box does not require an entry, leave it blank.

b. The company experienced a hazardous materials spill at one of its plants during the previous period. This spill has resulted in a number of lawsuits to which the company is a party. The Environmental Protection Agency (EPA) has fined the company $_______________, which the company is contesting in court. Although the company __________ admit fault, legal counsel believes that the fine payment is __________ . In addition, an employee has sued the company. A $_______ out-of-court settlement has been reached with the employee. The EPA fine and out-of-court settlement have been recognized as __________ for the period. There is one other outstanding lawsuit related to this incident. Counsel ____________ believe that the lawsuit has merit. Other lawsuits and unknown liabilities may arise from this incident.