Contingency and Commitment
Response to the following problem:
Supey Chemical Co. encountered the following two situations in 2010:
1. Supey must pay an indeterminate amount for toxic waste cleanup on its land. An adjoining land owner, Gap Toothpaste, sold its property because of possible toxic contamination by Supey of the water supply and resulting potential adverse public reaction towards its product. Gap sued Supey for damages. There is a reasonable possibility that Gap will prevail in the suit.
2. At December 31, 2010, Supey had a noncancellable purchase contract for 10,000 pounds of Chemical XZ, for delivery in June 2011. Supey does not hedge its contracts. Supey uses this chemical to make Product 2-Y. In December 2010, the U.S. Food and Drug Administration banned the sale of Product 2-Y in concentrated form. Supey will be allowed to sell Product 2-Y in a diluted form; however, it will take at least five years to use the 10,000 pounds of Chemical XZ. Supey believes the sales price of the diluted product will not be sufficient to recover the contract price of Chemical XZ.
Required
1. (a) In its 2010 financial statements, how should Supey report the toxic waste cleanup? Why is this reporting appropriate?
(b) In its 2010 financial statements, how should Supey report Gap's claim against it? Why is this reporting appropriate?
2. In its 2010 financial statements, how should Supey report the effects of the contract to purchase Chemical XZ? Why is this reporting appropriate?