(Accounting for a possible loss, LO 8) Hoselaw Ltd. (Hoselaw) is a privately owned manufacturing company in eastern Ontario. The company is owned by five shareholders, three of whom are not active in management of the business. The company has a large demand loan outstanding at the bank.

The government recently informed Hoselaw’s management that seepage from a dumpsite on its property might have polluted the ground water that is used by a local community. The company has denied responsibility, but the local community has launched a $2,000,000 lawsuit against Hoselaw to compensate the community for additional costs of obtaining fresh water and for cleaning up the contaminated water. The lawyers for the community and the company have met to discuss possible settlement terms, but little progress has been reported. Hoselaw’s net income over the last five years has averaged $725,000 and its assets, as reported on the most recent balance sheet, have a NBV of $3,750,000.

Required:

Prepare a report to Hoselaw’s president discussing the issues surrounding how to account for the environmental incident and the lawsuit. Your report should include a discussion of the alternative accounting treatments available and the implications of each.