Dinoco Petroleum faces three potential contingency situations, described below. Dinoco's fiscal year ends December 31, 2012, and it issues its 2012 financial statements on March 15, 2013.
Required:
Determine the appropriate means of reporting each situation for the year ended December 31, 2012, and record any necessary entries. Explain your reasoning.
1. In the initial trial, Dinoco lost a $120 million lawsuit resulting from a dispute with a supplier. The case is under appeal. Although Dinoco is unable to predict the outcome, it does not expect the case to have a material adverse effect on the company. 2. In November 2011, the state of Texas filed suit against Dinoco, seeking civil penalties and injunctive relief for violations of environmental laws regulating hazardous waste.
On January 12, 2013, Dinoco reached a settlement with state authorities. Based upon discussions with legal counsel, it is probable that it will require $140 million to cover the cost of violations.
3. Dinoco is the plaintiff in a $200 million lawsuit filed against a customer 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 Dinoco will prevail and be awarded $100 million.