P13–6 - Eastern Manufacturing - Various contingencies ● LO5 LO6
Eastern Manufacturing is involved with several
situations that possibly involve contingencies. Each is described below.
Eastern’s fiscal year ends December 31, and the 2011 financial
statements are issued on March 15, 2012.
a. Eastern is
involved in a lawsuit resulting from a dispute with a supplier. On
February 3, 2012, judgment was rendered against Eastern in the amount of
$107 million plus interest, a total of $122 million. Eastern plans to
appeal the judgment and is unable to predict its outcome though it is
not expected to have a material adverse effect on the company.
b. In November 2010, the State of Nevada filed suit
against Eastern, seeking civil penalties and injunctive relief for
violations of environmental laws regulating hazardous waste. On January
12, 2012, Eastern reached a settlement with state authorities. Based
upon discussions with legal counsel, the Company feels it is probable
that $140 million will be required to cover the cost of violations.
Eastern believes that the ultimate settlement of this claim will not
have a material adverse effect on the company.
c. Eastern is the plaintiff in a $200 million lawsuit
filed against United Steel for damages due to lost profits from rejected
contracts and for unpaid receivables. The case is in final appeal and
legal counsel advises that it is probable that Eastern will prevail and
be awarded $100 million.
d. At March 15, 2012, the Environmental Protection
Agency is in the process of investigating possible soil contamination at
various locations of several companies including Eastern. The EPA has
not yet proposed a penalty assessment. Management feels an assessment is
reasonably possible, and if an assessment is made an unfavorable
settlement of up to $33 million is reasonably possible.
Required:
1. Determine the appropriate means of reporting each situation. Explain your reasoning.
2. Prepare any necessary journal entries and disclosure notes.
