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 home’s 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 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.

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