The following legal situations apply to Dabney Corp. for 2014:
1. A customer slipped and fell on a slick floor while shopping in the retail store. The customer has filed a $5 million lawsuit against the company. Dabney’s attorney knows that the company will have to pay some damages but is reasonably certain that the suit can be settled for $750,000.
2. The EPA has assessed a fine against Dabney of $250,000 for hazardous emissions from one of its manufacturing plants. The EPA had previously issued a warning to Dabney and required Dabney to make repairs within six months. Dabney began to make the repairs, but was not able to complete them within the six-month period. Because Dabney has started the repairs, Dabney’s attorney thinks the fine will be reduced to $100,000. He is approximately 80 percent certain that he can negotiate the fine reduction because of the repair work that has been completed.
3. One of Dabney’s largest manufacturing facilities is located in “tornado alley.” Property is routinely damaged by storms. Dabney estimates it may have property damage of as much as $400,000 this coming year.

a. Discuss the various categories of contingent liabilities.
b. For each item above determine the correct accounting treatment.

  • CreatedMay 22, 2014
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