Task: Contingent Liabilities: Eastern Chemical Co.
The following contingent matters involve your client:
Problem 1. Eastern's attorneys indicated that they believe it is probable that Eastern will lose an ongoing dispute with the IRS, likely between $900,000 and $1,400,000. After the 2014 financial statements were issued, the case was settled with the IRS for $1,200,000.
Problem 2. Environmental Protection Agency has cited Eastern for a violation of EPA laws. Eastern's management along with its counsel have concluded that it is probable that Eastern will be found responsible for the violation, and a reasonable estimate of these damages is $5,000,000. Eastern's has insurance for these type of events up to a maximum of $9,000,000 per event and has a deductible on the policy of $500,000.
Problem 3. Eastern had a manufacturing plant in Syria, which was destroyed during a recent uprising. It is not certain who will compensate Eastern for this destruction, but Eastern has been assured by State Department officials that will receive some funds to offset the loss, less than the fair value but more than book value.
How should the contingency be reported in the financial statements of Eastern? Show journal entries and sample disclosure footnotes.