EX 10-24 Contingent liabilities ### Exercise: Contingent LiabilitiesSeveral 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. Additionally, an employee is seeking $220,000 in damages related to the spill. A homeowner, living 35 miles from the plant and believing the incident reduced the home’s resale value by $310,000, has also sued the company.Ayers' legal counsel believes:- The EPA fine will likely stand.- An out-of-court settlement of $125,000 with the employee is probable; final papers will be signed next week.- The homeowner's case is weaker and is expected to be decided in favor of Ayers.- Other litigation may arise, but the damage amounts are uncertain.### Tasksa. **Journalize the contingent liabilities** associated with the hazardous materials spill. Use the account “Damage Awards and Fines” to recognize the expense for the period.b. **Prepare a note disclosure** relating to this incident.

Contingent Liability: Contingent liability refers to any potential liability that can occur…

Answered: a. Journalize the contingent…

FINANCIAL ACCOUNTING

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ISBN:9781259964947

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Chapter1: Financial Statements And Business Decisions

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EX 10-24 Contingent liabilities

### Exercise: Contingent Liabilities

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. Additionally, an employee is seeking $220,000 in damages related to the spill. A homeowner, living 35 miles from the plant and believing the incident reduced the home’s resale value by $310,000, has also sued the company.

Ayers' legal counsel believes:
- The EPA fine will likely stand.
- An out-of-court settlement of $125,000 with the employee is probable; final papers will be signed next week.
- The homeowner's case is weaker and is expected to be decided in favor of Ayers.
- Other litigation may arise, but the damage amounts are uncertain.

### Tasks

a. **Journalize the contingent liabilities** associated with the hazardous materials spill. Use the account “Damage Awards and Fines” to recognize the expense for the period.

b. **Prepare a note disclosure** relating to this incident.

Definition Definition Costs that a business is responsible for paying, should a particular event potentially occur in the future. Also called a potential liability, a contingent liability is generally recorded only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly. The Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Principles (IFRS) make it mandatory for the companies to record any contingent liability taking the principles of full disclosure, materiality, and prudence into consideration.

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