Several months ago, Northwest Cover Paint Company experienced a hazardous 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. In addition, an employee is seeking $1,000,000 damages related to the spill. Last, a home owner has sued the company for $200,000. The home owner lives 25 miles from the plant, but believes that the incident has reduced the home's resale value by $200,000.
Northwest Cover's legal counsel believes that it is probable that the EPA fine will stand. In addition, counsel indicates that an out-of-court settlement of $300,000 has recently been reached with the employee. The final papers will be signed next week. Counsel believes that the homeowner's case is much weaker and will be decided in favor of Northwest Cover. Other litigation related to the spill is possible, but the damage amounts are uncertain.
Illustrate the effects of the contingent liabilities associate with the hazardous materials spill on the accounts and financial statements.
Prepare a note disclosure relating to the incident.