CHART OF ACCOUNTS Ayers Industries Inc. General Ledger ASSETS 110 Cash 111 Accou
ID: 2432735 • Letter: C
Question
CHART OF ACCOUNTS Ayers Industries Inc. General Ledger ASSETS 110 Cash 111 Accounts Receivable 112 Interest Receivable 113 Notes Receivable 115 Merchandise Inventory 116 Supplies 118 Prepaid Insurance 120 Land 123 Building 124 Accumulated Depreciation-Building 125 Office Equipment 126 Accumulated Depreciation-Office Equipment LIABILITIES 210 Accounts Payable 213 Interest Payable 214 Notes Payable 215 Salaries Payable 216 Social Security Tax Payable 217 Medicare Tax Payable 218 Employees Federal Income Tax Payable 219 Employees State Income Tax Payable 221 Retirement Savings Deductions Payable 224 Federal Unemployment Tax Payable 225 State Unemployment Tax Payable 226 Vacation Pay Payable 227 Unfunded Pension Liability 228 Litigation Claims Payable 229 EPA Fines Payable EQUITY 310 Common Stock 311 Retained Earnings 312 Dividends 313 Income Summary REVENUE 410 Sales 610 Interest Revenuenstructions Several months ago, Ayers Industries Inc. experienced a hazardous materials spillat one of its plants. As a result, the Environmental Protection Agency EPA) fined the company $238,000. The company is contesting the fine. In addition, an employee is seeking S210,000 in damages related to the spill Lastly, a homeowner has sued the company for $305,000. The homeowner lives 35 miles from the plant but believes that the incident has reduced the home's resale value by $305,000 Ayers' legal counsel believes that it is probable that the EPA fine will stand, In addition, counsel indicates that an out-of-court settlement of $125,000 has recently been reached with the employee. The final papers will be signed next week. Counsel beleves that the homeowner's case is much weaker and will be decided in favor of Ayers. Other litigation related to the spill is possible, but the damage amounts are uncertain. Required: A. On December 31, journalize the contingent liabilities associated with the hazardous materials spill Use the account "De Awards and Fines" to recognize the expense for the period. Refer to the Chart of Accounts for exact wording of account titles B. Prepare a note disclosure relating to this incident.
Explanation / Answer
Demand
Estimated Payable Amount
EPA
238000
238000
Employee
210000
125000
Homeowner
305000
0
363000
JE
Damage, Award & Fines
363000
EPA Files Payable
238000
Litigation Claims Payable
125000
The Damage, Award & Fine Payable should be disclosed in the Income Statement under "Other Expense"
The company experienced a hazardous materials spill at one of its plants during the previous period. This spill has resulted in a number of lawsuits to which the company is a party. The Environmental Protection Agency (EPA) has fined the company $238,000, which the company is contesting in court. Although the company does not admit fault, legal counsel believes that the fine payment is probable. In addition, an employee has sued the company. A $125,000 out-of- court settlement has been reached with the employee. The EPA fine and out-of- court settlement have been recognized as an expense for the period. There is one other outstanding lawsuit related to this incident. Counsel does not believe that the lawsuit has merit. Other lawsuits and unknown liabilities may arise from this incident
Demand
Estimated Payable Amount
EPA
238000
238000
Employee
210000
125000
Homeowner
305000
0
363000
JE
Damage, Award & Fines
363000
EPA Files Payable
238000
Litigation Claims Payable
125000
The Damage, Award & Fine Payable should be disclosed in the Income Statement under "Other Expense"