Question

The Dow Chemical Company provides chemical, plastic, and agricultural products and services to various consumer markets. The following excerpt is taken from the disclosure notes of Dow’s 2015 annual report: In total, the Company’s accrued liability for probable environmental remediation and restoration costs was $670 million at December 31, 2015, compared with $706 million at the end of 2014. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Company has accrued liabilities, although it is reasonably possible that the ultimate cost with respect to these particular matters could range up to approximately two and a half times that amount. Required: Does the excerpt describe a loss contingency? Under what conditions would Dow accrue such a contingency? What journal entry would Dow use to record this amount of provision (loss)?

Answer 1

ques 1 & 2
Loss contingency	Yes
Conditions	Probable and reasonably estimable
ques 3
Event	General Journal	Debit	Credit
1	Loss provision from environmental claims	670
	Liability for settlement of environmental claims		670
explanation
The note describes a loss contingency. Dow anticipates a future sacrifice of economic benefits (cost of remediation and restoration) due to an existing circumstance (environmental violations) that depends on an uncertain future event (requirement to pay claim). Dow considers the liability probable and the amount is reasonably estimable. In practice this liability would be accrued in multiple entries, increasing when Dow recognized additional liability and decreasing either when Dow paid off parts of the liability or revised downward their estimate of remediation and restoration costs.