Question

The Dune Chemical Company provides chemical, plastic, and agricultural products and services to various consumer markets. The following excerpt is taken from the disclosure notes of Dune’s 2015 annual report: In total, the Company’s accrued liability for probable environmental remediation and restoration costs was $728 million at December 31, 2015, compared with $760 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 Dune accrue such a contingency?

What journal entry would Dune use to record this amount of provision (loss)?

Answer 1

Yes, the excerpt does describe a loss contingency. This is because there is an anticipation of future sacrifice of economic benefits (through costs of remediation and restoration). This anticipation is due to an existing circumstance (i.e. economic violation) and this is dependent on an uncertain future event (i.e. requirement to pay claim).

Dune would accrue such a contingency when the contingency is probable and reasonably estimable in nature.

The journal entry will be:

	(in $ millions)
Account title	Debit	Credit
Loss provision from environmental claims	728
Liability for settlement of environmental claims		728