Chapter 13, Problem 13.9P

Subsequent events

• LO13–6

Lincoln Chemicals became involved in investigations by the U.S. Environmental Protection Agency in regard to damages connected to waste disposal sites. Below are four possibilities regarding the timing of (A) the alleged damage caused by Lincoln, (B) an investigation by the EPA, (C) the EPA assessment of penalties, and (D) ultimate settlement. In each case, assume that Lincoln is unaware of any problem until an investigation is begun. Also assume that once the EPA investigation begins, it is probable that a damage assessment will ensue and that once an assessment is made by the EPA, it is reasonably possible that a determinable amount will be paid by Lincoln.

Required:

For each case, decide whether (1) a loss should be accrued in the financial statements with an explanatory note, (2) a disclosure note only should be provided, or (3) no disclosure is necessary.