Question
Presented below are three independent situations. Answer the question at the end of each situation. (i) During 2017, Desmond Inc. became involved in a tax
Presented below are three independent situations. Answer the question at the end of each situation. (i) During 2017, Desmond Inc. became involved in a tax dispute with the government. Desmond's attorneys have indicated that they believe it is probable that Desmond will lose this dispute. They also believe that Desmond will have to pay the government between $800,000 and $1,400,000. After the 2017 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, 2017? (ii) On October 1, 2018, Winslow Chemical was identified as a potentially responsible party by its Environmental Regulatory Agency. Winslow's management along with its counsel have concluded that it is probable that Winslow will be responsible for damages, and a reasonable estimate of these damages is $6,000,000. Winslow's insurance policy of $9,000,000 has a deductible clause of $500,000. How should Winslow Chemical report this information in its financial statements at December 31, 2018? (iii) Carrie Inc. had a manufacturing plant in Virginia, which was destroyed in the civil war. It is not certain who will compensate Carrie for this destruction, but Carrie 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 financialstatements of Carrie Inc?
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