A contingent liability note from DuPont Co.'s 2003 financial statements is reproduced below.
The company is also subject to contingencies pursuant to environmental laws and regulations that in the future may require the company to take further action to correct the effects on the environment of prior disposal practices or releases of chemical or petroleum substances by the company or other parties. The company accrues for environmental remediation activities . . . . At December 31, 2003, the company's Consolidated Balance Sheet includes a liability of $380 relating to these matters and, in management's opinion, is appropriate based on existing facts and circumstances. The average time frame over which the accrued or presently unrecognized amounts may be paid, based on past history, is estimated to be 15-20 years. Considerable uncertainty exists with respect to these costs and, under adverse changes in circumstances, potential liability may range up to two to three times the amount accrued as of December 31, 2003.
On September 10, 2004, The Wall Street Journal reported the following:
In a proposed settlement of a class-action lawsuit that could involve payouts of more than $300 million, DuPont Co. is betting that science is on its side.
The nation's No. 2 chemical maker yesterday agreed to settle allegations that it contaminated water supplies with a toxic chemical used to make Teflon, a slippery substance that can be found in everything from cookware to clothing. It requires the company to pay plaintiffs $85 million, plus other expenditures, as well as pay attorney's fees and expenses of $22.6 million.
But its payments could rise by another $235 million depending on whether a $5 million study the company will fund finds a probable link between exposure to the chemical and any diseases.
1. How would the $380 million in environmental liabilities be reported on DuPont's financial statements, assuming that $270 million of this amount was estimated to be paid in fiscal 2004? Provide the journal entry.
2. How would DuPont account for the Teflon settlement payments during 2004, assuming the cost was accrued in the prior year? How would this answer differ if the costs had not previously been accrued?
3. What are the different ways in which the company could handle the additional $235 million in potential payments related to the environmental study? How would you account for these costs?