Nature of Intangibles
Response to the following problem:
The Johnson Company operates several plants at which it processes limestone into quicklime and hydrated lime. The Bland Plant, where most of the equipment was installed many years ago, continually deposits a dusty white substance over the surrounding countryside. Citing the unsanitary condition of the neighboring community of Adeltown, the pollution of the Adel River, and the high incidence of lung disease among workers at Bland, the state's Pollution Control Agency has ordered the installation of air pollution control equipment. Also, the Agency has assessed a substantial penalty, which will be used to clean up Adeltown. After considering the costs involved (which could not have been reasonably estimated prior to the Agency's action), Johnson decides to comply with the Agency's orders, the alternative being to cease operations at Bland at the end of the current fiscal year. The officers of Johnson agree that the air pollution control equipment should be capitalized and depreciated over its useful life, but they disagree over the period(s) to which the penalty should be expensed.
Required:
Explain the conceptual merits and reporting requirements of accounting for the penalty as a
1. Charge to the current period
2. Correction of prior periods
3. Capitalizable item to be amortized over future periods.