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Exercise 13-13_Accounting of Liabilities




Question;Exercise 13-13 (Essay);Presented below are three independent;situations. Answer the question at the end of each situation.;(a);During 2014, Salt-n-Pepa Inc. became;involved in a tax dispute with the IRS. Salt-n-Pepa?s attorneys have indicated;that they believe it is probable that Salt-n-Pepa will lose this dispute. They;also believe that Salt-n-Pepa will have to pay the IRS between $900,000 and;$1,400,000. After the 2014 financial statements were issued, the case was;settled with the IRS for $1,200,000. What amount, if any, should be reported as;a liability for this contingency as of December 31, 2014?;(b);On October 1, 2014, Alan Jackson Chemical;was identified as a potentially responsible party by the Environmental;Protection Agency. Jackson?s management along with its counsel have concluded;that it is probable that Jackson will be responsible for damages, and a;reasonable estimate of these damages is $5,000,000. Jackson?s insurance policy;of $9,000,000 has a deductible clause of $500,000. How should Alan Jackson;Chemical report this information in its financial statements at December 31;2014?;?;Melissa Etheridge Inc. had a manufacturing;plant in Sudan, which was destroyed in the civil war. It is not certain who;will compensate Etheridge for this destruction, but Etheridge has been assured;by governmental officials that it will receive a definite amount for this;plant. The amount of the compensation will be less than the fair value of the;plant, but more than its book value. How should the contingency be reported in;the financial statements of Etheridge Inc.?


Paper#37522 | Written in 18-Jul-2015

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