Posted: April 15th, 2016

What amount, if any, should be reported as a liability for this contingency as of 12/31/12?


a). During 2012, Maverick Inc. became involved in a tax dispute with the IRS. Maverick’s attorneys have indicated that they believe it is probable that Maverick will lose this dispute. They also believe that Maverick will have to pay the IRS between $800,000 and $1,400,000. After 2012 financial statements were issued, the case was settled with the IRS for $1,200,000. What amount, if any, should be reported as a liability for this contingency as of 12/31/12?

b). On 10/1/12, Holmgren Chemical was identified as a potentially responsible party by the Environmental Protection Agency. Holmgren’s management along with its counsel have concluded that is probable that Holmgren will be responsible for damages, and a reasonable estimated of these damages is $6,000,000. Holmgren’s insurance policy of $9,000,000 has a deductible clause of $500,000. How should Holmgren Chemical report this information in its financial statements at 12/31/12?

c). Shinobi Inc. had a manufacturing plant in Darfur, which was destroyed in the civil war. It is not certain who will compensate Shinobi for this destruction, but Shinobi has been assured by governmental officials that will receive a definite amount for this plant. The amount of the compensation will be less than the fair value of the plant but more than its book value. How should the contingency be reported in the financial statements of Shinobi Inc.?

Asset Retirement Obligation

Bassinger Company purchases an oil tanker depot in 1/1/12, at a cost of $600,000. Bassinger expects to operate the depot for 10 years, at which time it is legally required to dismantle the depot and remove the underground storage tanks. It is estimated that it will cost $70,000 to dismantle the depot and remove the tanks at the of the depot’s useful life.

a). Prepare the journal entries to record the depot (considered a plant asset) and the asset retirement obligation for the depot on 1/1/12. Based on an effective-interest rate of 6%, the fair value of the asset retirement obligation on 1/1/12, is $39,087.

b). Prepare the journal entries required for the depot and asset retirement obligation at 12/31/12. Bassinger uses straight-lime depreciation; the estimated residual value for the depot is 0.

c). On 12/31/12. Bassinger pays a demolition firm to dismantle the depot and remove the tanks at a price of $80,000. Prepare the journal entry for the settlement of the asset retirement obligation.

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