Question - The following selected transactions relate to contingencies of Bowe-Whitney Inc. Bowe Whitney's fiscal year ended on December 31, 2010, and financial statements were published in March 2011.
a) Since August of 2010, Bowe-Whitney has been involved in labor disputes at two of its facilities. Negotiations between the company and the unions have not produced a settlement and, since January 2008, strikes have been ongoing at these facilities. It is virtually certain that material costs will be incurred but the amount of resultant costs cannot be adequately predicted.
b) Bowe-Whitney is the defendant in a lawsuit filed in December 2010, in which Access Company seeks $10 million as an adjustment to the purchase price related to the sale of Bowe-Whitney's hardwood division in 2010. The lawsuit alleges that Bowe-Whitney misrepresented the division's assets and liabilities. Legal counsel advises that it is reasonably possible that Bowe-Whitney could lose $5 million, but that it's extremely unlikely it could lose the $10 million asked for.
c) At March 1, 2011, the EPA is in the process of investigating the possibility of environmental violations at one of Bowe-Whitney's sites, but has not proposed a penalty assessment. Management feels an assessment is reasonably possible, and if an assessment is made, a settlement of up to $33 million is probable.
Required: Prepare journal entries that should be recorded as a result of each of the above contingencies. If no journal entry is needed, briefly explain why.