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 $240,000. The company is contesting the fine. In addition, an employee is seeking $220,000 in damages related to the spill. Lastly, a homeowner has sued the company for $310,000. The homeowner lives 35 miles from the plant but believes that the incident has reduced the homes resale value by $310,000.

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 $125,000 has recently been reached with the employee. The final papers will be signed next week. Counsel believes that the homeowners 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.

Required:

A.

On December 31, journalize the contingent liabilities associated with the hazardous materials spill. Use the account Damage Awards and Fines to recognize the expense for the period. Refer to the Chart of Accounts for exact wording of account titles.

B. Prepare a note disclosure relating to this incident.

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 selector 1

$530,000

$240,000

$125,000

$365,000

, which the company is contesting in court. Although the company selector 2

does

does not

admit fault, legal counsel believes that the fine payment is selector 3

remote

probable

reasonably possible

. In addition, an employee has sued the company. A selector 4

$125,000

$365,000

$240,000

$530,000

out-of-court settlement has been reached with the employee. The EPA fine and out-of-court settlement have been recognized as selector 5

revenue

an expense

a current asset

for the period. There is one other outstanding lawsuit related to this incident. Counsel selector 6

does

does not

believe that the lawsuit has merit. Other lawsuits and unknown liabilities may arise from this incident.

Points:

Feedback

Check My Work

Explanation

CHART OF ACCOUNTS

Ayers Industries Inc.

General Ledger

	ASSETS
110	Cash
111	Accounts Receivable
112	Interest Receivable
113	Notes Receivable
115	Merchandise Inventory
116	Supplies
118	Prepaid Insurance
120	Land
123	Building
124	Accumulated Depreciation-Building
125	Office Equipment
126	Accumulated Depreciation-Office Equipment

	LIABILITIES
210	Accounts Payable
213	Interest Payable
214	Notes Payable
215	Salaries Payable
216	Social Security Tax Payable
217	Medicare Tax Payable
218	Employees Federal Income Tax Payable
219	Employees State Income Tax Payable
221	Retirement Savings Deductions Payable
224	Federal Unemployment Tax Payable
225	State Unemployment Tax Payable
226	Vacation Pay Payable
227	Unfunded Pension Liability
228	Litigation Claims Payable
229	EPA Fines Payable

	EQUITY
310	Owner, Capital
311	Owner, Drawing
312	Income Summary

	REVENUE
410	Sales
610	Interest Revenue

	EXPENSES
510	Cost of Merchandise Sold
520	Salaries Expense
524	Depreciation Expense-Building
525	Delivery Expense
526	Repairs Expense
529	Selling Expenses
531	Rent Expense
532	Depreciation Expense-Office Equipment
533	Insurance Expense
534	Supplies Expense
535	Payroll Tax Expense
536	Vacation Pay Expense
537	Pension Expense
538	Cash Short and Over
539	Product Warranty Expense
540	Miscellaneous Expense
710	Interest Expense
720	Damage Awards and Fines