Ask Me Help Desk - Liabilities and Contingencies

Madison Paper Inc. owns and operates a large pulp and paper mill in western Georgia. In late December 2010, as accountants are closing the books for the fiscal year, they note several outstanding legal issues. One issue is an Environmental Protection Agency (EPA) pending fine related to airborne emissions of dioxins and furans that occurred over a 3-year period. A second item involves a wrongful discharge case by a former employee who was terminated in August 2010. Lastly, a current employee has filed suit against the company for compensatory damages for a work-related injury incurred while operating equipment in the mill that was later found to be damaged. The employee is seeking damages on the order of $2,500,000.

1. Journalize the contingent liabilities that Madison Paper Inc. should recognize for this fiscal period

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Originally Posted by Mrsbbbbb

Madison Paper Inc. owns and operates a large pulp and paper mill in western Georgia. In late December 2010, as accountants are closing the books for the fiscal year, they note several outstanding legal issues. One issue is an Environmental Protection Agency (EPA) pending fine related to airborne emissions of dioxins and furans that occurred over a 3-year period. A second item involves a wrongful discharge case by a former employee who was terminated in August 2010. Lastly, a current employee has filed suit against the company for compensatory damages for a work-related injury incurred while operating equipment in the mill that was later found to be damaged. The employee is seeking damages on the order of $2,500,000.

1. Journalize the contingent liabilities that Madison Paper Inc. should recognize for this fiscal period

A little hard to do as estimates are needed to put a figure on each liability. If good numbers can be obtained for the outcome in the first two they can be expensed in the current year leave the third as contingent

Sorry but I left out part of the problem, here it is in its entirety!

Madison Paper Inc. owns and operates a large pulp and paper mill in western Georgia. In late December 2010, as accountants are closing the books for the fiscal year, they note several outstanding legal issues. One issue is an Environmental Protection Agency (EPA) pending fine related to airborne emissions of dioxins and furans that occurred over a 3-year period. A second item involves a wrongful discharge case by a former employee who was terminated in August 2010. Lastly, a current employee has filed suit against the company for compensatory damages for a work-related injury incurred while operating equipment in the mill that was later found to be damaged. The employee is seeking damages on the order of $2,500,000.

Madison's legal counsel suggests that the EPA fine may total $5,500,000 but will not be settled within the next year. Counsel does not think there is substantial merit to the wrongful discharge case in which the former employee is suing for $1,500,000. The case involving the current employee is believed to have merit but might, in all likelihood, be settled out of court for $500,000 in the next 9 - 12 months.

1. Journalize the contingent liabilities that Madison's Paper Inc. should recognize for this fiscal period.

Two items are contingent the third may be accrued as current year expenses. Even if each case may be decided in the companies favour the item is contingent, this is what a contingent liability means and full provision should be made for the claims

I would report expense of $5,500,000 and contingent liabilities of $4,000,000. This is the conservative approach required by accounting standards