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Presented beneath are three independent conditions. Answer the problem at the end of each condition.

A. During the year 2012, Maverick Inc. became included in a tax dispute with the IRS. Maverick's attorneys have indicated that they believe it is probable which Maverick will lose this dispute. They as well believe that Maverick will have to pay the IRS between $800,000 and $1,400,000. After the 2012 financial statements were issued, the case was settled with IRS for $1,200,000. Find out the amount, if any, must be reported as a liability for this contingency as of December 31, 2012?

B. On October 1, 2012, Holmgren Chemical was recognized as a potentially responsible party by the Environmental Protection Agency. Holmgren's management all along with its counsel has concluded that it is probable that Holmgren will be accountable for damages, and a reasonable estimate of such damages is $6,000,000. Holmgren's insurance policy of $9,000,000 has a deductible clause of $500,000. How must Holmgren Chemical report this information in its financial statements at December 31, 2012?

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

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M915886

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