The Environmental Protection Agency (EPA) is in the process
of investigating a possible water contamination issue at the manufacturing
facility of Northwest Forest Products. 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 is estimated between $20 and $30
million.
Which of the following statements is true?
A loss and a liability must be recorded for $20 million.
A disclosure note should be included in the financial
statements, without an entry.
A loss must be recorded for $30 million and a liability must
be recorded for $20 million.
A loss must be recorded for $20 million and a liability must
be recorded for $30 million.
Northwest Forest Products has a contingent liability that is
reasonably possible and reasonably estimable, within a range between $20 and
$30 million. Since the loss is reasonably possible, but not probable, we will
carefully disclose the situation, but not record the potential loss and
liability in the financial records. Details regarding the investigation by the
EPA, the reasonable possibility of an assessment, and the range of settlements
should be included in the disclosure.
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