Question

Problem N4 Barlowe, Inc. is involved with several situations that possib Each is described below. Barlow's fiscal year ends December 31, and the issued on March 1, 2019 fuations that possibly involve contingencies. cember 31, and the 2018 financial statements are Required: 1. Determine the appropriate means of reporting cach Explain your reasoning 2. Prepare any necessary journal entries g each situation (Recognition Disclosure, or None) 1. At March 1, 2019, the EPA is in the process of Barlowe's facilities, but has not proposed a deficiency assess assessment is reasonably possible, and if an assessmen to $8 million is reasonably possible. in the process of investigating possible chemical leaks at two of onably possible, and if anasessment is made an unfavorable settlement of op proposed a deficiency assessment Management feels an 2. Barlowe is the plaintiff in a $3 million lawsuit filed against Fare Corp 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 Barlowe will prevail and be awarded $25 million 3. In July 2015, the State of Arkansas filed suit against Barlowe, seeking civil penalties and injunctive relief for violations of environmental laws regulating hazardous waste. On February 12, 2019, Barlowe reached a settlement with state authorities. Based upon discussions with legal counsel, the Company feels it is probable that S13 million will be required to cover the cost of violations. Barlowe believes that the ultimate settlement of this claim will not have a material adverse effect on the company. 4. Barlowe is involved in a lawsuit resulting from a dispute with a customer. On January 5, 2019, judgment was rendered against Barlowe in the amount of S16 million plus interest, a total of 18 million Barlowe 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

Answer 1

Solution:

PART 1- In this scenario, the EPA has merely started the process of investigation into Barlowe Inc., it has not levied any penalties on the company and at this moment, there is no probable outflow of monetary resources to settle any liability. Since the EPA has not charged any concrete penalty or declared it's intention to do so, the appropriate means of reporting in this case would be none. Hence due to no concrete liability imposed by the EPA; and because probability of outflow of resources embodying economic benefits at this point in time is nil, the reporting would be NONE.

PART 2- In this scenario, Barlowe's legal counsel has advised them that is is likely that they will be awarded 25 million dollars in damages, since at this point in time, we cannot say with certainty whether the amount will be awarded or be of the specified amount, the question of recognition does not arise. In this case the appropriate means of reporting would be a disclosure stating that 'in a legal case, it is the opinion of the counsel that the company will be awarded 25 million in damages." Hence the reporting would involve a DISCLOSURE containing our legal counsel's opinion.

PART 3- In this scenario, Barlowe Inc. has reached a settlement with the authorities with regard to their violations. The amount of outflow of resources embodying economic resources in this case can be reliably estimated as the company believes $13 million will be required to settle the charges. Hence the appropriate means of reporting would be RECOGNITION of the liability since the charges imposed by the state have been accepted by the company in the form of a settlement and payment will have to be done. The journal entry in this case is as follows:

Dr. Penalty expense A/c 13,000,000

Cr. Payable to the state of Arkansas A/c 13,000,000

PART 4- In this scenario, Barlowe Inc is involved in a lawsuit where it was ruled against and rendered with a judgement to pay $18 million, Barlowe Inc plans to appeal this judgement. Since at this point in time the company cannot reliably predict the amount of outflow required to settle the liability and the case's final outcome has not yet been determined, the appropriate means of reporting would be Disclosure. Hence due to the uncertainty regarding outflow of economic resources and the amount of money required to settle the liability, the reporting would be a DISCLOSURE saying "a case is pending against the company which is being appealed by Barlowe Inc. in which the initial judgement was of a total sum of $18 million.