The following legal situations apply to Stringer Corp. for 2012:

1. A customer slipped and fell on a slick floor while shopping in the retail store. The customer has filed a $5 million lawsuit against the company. Stringer’s attorney knows that the company will have to pay some damages but is reasonably certain that the suit can be settled for $500,000.

2. The EPA has assessed a fi ne against Stringer of $250,000 for hazardous emissions from one of its manufacturing plants. The EPA had previously issued a warning to Stringer and required Stringer to make repairs within six months. Stringer began to make the repairs, but was not able to complete them within the six-month period. Because Stringer has started the repairs, Stringer’s attorney thinks the fi ne will be reduced to $100,000. He is approximately 80 percent certain that he can negotiate the fi ne reduction because of the repair work that has been completed.

3. One of Stringer’s largest manufacturing facilities is located in “tornado alley.” Property is routinely damaged by storms. Stringer estimates it may have property damage of as much as $300,000 this coming year.

Required

a. Discuss the various categories of contingent liabilities.

b. For each item above determine the correct accounting treatment.