Middle East Company is involved in several situations that possibly involve contingencies. Each is described below. The Company's fiscal year ends December 31, and the 2011 financial statements are issued on March 1, 2012. a. At March 1, 2012, the Environmental Protection Agency is in the process of investigating possible chemical leaks at two of the Company's facilities, but has not proposed a deficiency assessment. Management feels an assessment is reasonably possible, and if an assessment is made an unfavorable settlement of up to $8 million is reasonably possible. b. Middle East Company is the plaintiff in a $33 million lawsuit filed against Muscat Corp. for damages due to lost profits from rejected contracts and for unpaid receivables. The case is in final appeal and legal counsel advises that it is probable that Middle East Company will prevail and be awarded $25 million. c. In July 2010, the Local Municipality filed suit against Middle East Company, seeking civil penalties and injunctive relief for violations of environmental laws regulating hazardous waste. On February 12, 2012, Middle East Company reached a settlement with the municipal authorities. Based upon discussions with legal counsel, the Company feels it is probable that $13 million will be required to cover the cost of violations. Middle East Company believes that the ultimate settlement of this claim will not have a material adverse effect on the company. d. Middle East Company is involved in a lawsuit resulting from a dispute with a customer. On January 5, 2012, judgment was rendered against Middle East Company in the amount of $16 million plus interest, a total of $18 million. Middle East Company plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the company. Required: 1. Determine the appropriate means of reporting each situation. Explain your reasoning. 2. Prepare any necessary journal entries.
Middle East Company is involved in several situations that possibly involve contingencies. Each is described below. The Company's fiscal year ends December 31, and the 2011 financial statements are issued on March 1, 2012. a. At March 1, 2012, the Environmental Protection Agency is in the process of investigating possible chemical leaks at two of the Company's facilities, but has not proposed a deficiency assessment. Management feels an assessment is reasonably possible, and if an assessment is made an unfavorable settlement of up to $8 million is reasonably possible. b. Middle East Company is the plaintiff in a $33 million lawsuit filed against Muscat Corp. for damages due to lost profits from rejected contracts and for unpaid receivables. The case is in final appeal and legal counsel advises that it is probable that Middle East Company will prevail and be awarded $25 million. c. In July 2010, the Local Municipality filed suit against Middle East Company, seeking civil penalties and injunctive relief for violations of environmental laws regulating hazardous waste. On February 12, 2012, Middle East Company reached a settlement with the municipal authorities. Based upon discussions with legal counsel, the Company feels it is probable that $13 million will be required to cover the cost of violations. Middle East Company believes that the ultimate settlement of this claim will not have a material adverse effect on the company. d. Middle East Company is involved in a lawsuit resulting from a dispute with a customer. On January 5, 2012, judgment was rendered against Middle East Company in the amount of $16 million plus interest, a total of $18 million. Middle East Company plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the company. Required: 1. Determine the appropriate means of reporting each situation. Explain your reasoning. 2. Prepare any necessary journal entries.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Financial Accounting and Reporting II
Middle East Company is involved in several situations that possibly involve contingencies. Each is described below. The
Company's fiscal year ends December 31, and the 2011 financial statements are issued on March 1, 2012.
a. At March 1, 2012, the Environmental Protection Agency is in the process of investigating possible chemical leaks at
two of the Company's facilities, but has not proposed a deficiency assessment. Management feels an assessment is
reasonably possible, and if an assessment is made an unfavorable settlement of up to $8 million is reasonably possible.
b. Middle East Company is the plaintiff in a $33 million lawsuit filed against Muscat Corp. for damages due to lost profits
from rejected contracts and for unpaid receivables. The case is in final appeal and legal counsel advises that it is probable
that Middle East Company will prevail and be awarded $25 million.
c. In July 2010, the Local Municipality filed suit against Middle East Company, seeking civil penalties and injunctive relief
for violations of environmental laws regulating hazardous waste. On February 12, 2012, Middle East Company reached a
settlement with the municipal authorities. Based upon discussions with legal counsel, the Company feels it is probable
that $13 million will be required to cover the cost of violations. Middle East Company believes that the ultimate
settlement of this claim will not have a material adverse effect on the company.
d. Middle East Company is involved in a lawsuit resulting from a dispute with a customer. On January 5, 2012, judgment
was rendered against Middle East Company in the amount of $16 million plus interest, a total of $18 million. Middle East
Company plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material
adverse effect on the company.
Required:
1. Determine the appropriate means of reporting each situation. Explain your reasoning.
2. Prepare any necessary journal entries.
A BI na-
= 而
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