Several months ago, Northwest Cover Paint Company experienced ahazardous materials spill at one of its plants. As a result,the Environmental Protection Agency (EPA) fined the company$750,000. The company is contesting the fine. Inaddition, an employee is seeking $1,000,000 damages related to thespill. Last, a homeowner has sued the company for$200,000. The homeowner lives 25 miles from the plant, butbelieves that the incident has reduced the home's resalevalue by $200,000.
Northwest Cover's legal counsel believes that it isprobable that the EPA fine will stand. In addition, counselindicates that an out-of-court settlement of $300,000 has recentlybeen reached with the employee. The final papers will besigned next week. Counsel believes that the homeowner'scase is much weaker and will be decided in favor of NorthwestCover. Other litigation related to the spill is possible, butthe damage amounts are uncertain.
1. Illustrate the effects of the contingentliabilities associate with the hazardous materials spill on theaccounts and financial statements.
2. Prepare a note disclosure relating to the incident.