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Holmgren

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E13-13 (Contingencies) Presented below are three independent situations. Answer the question at the
end of each situation.

1. During 2012, Maverick Inc. became involved in a tax dispute with the IRS. Maverick’s attorneys have indicated that they believe it is probable that Maverick will lose this dispute. They also believe that
Maverick will have to pay the IRS between 800,000 and 1,400,00 After the 2012 financial statements
were issued, the case was settled with the IRS for 1,200,000 What amount, if any, should be
reported as a liability for this contingency as of December 31, 2012?

2. On October 1, 2012, Holmgren Chemical was identified as a potentially responsible party by the Environmental Protection Agency. Holmgren’s management along with its counsel have concluded that it is probable that Holmgren will be responsible for damages, and a reasonable estimate of these damages $6,000,000 . Holmgren’s insurance policy of 9,000,000 has a deductible clause of 500,000
How should Holmgren Chemical report this information in its financial statements at December 31, 2012?

3. Shinobi Inc. had a manufacturing plant in Darfur, which was destroyed in the civil war. It is not certain who will compensate Shinobi for this destruction, but Shinobi has been assured by governmental officials that it will receive a definite amount for this plant. The amount of the compensation will be less than the fair value of the plant but more than its book value. How should the contingency be reported in the financial statements of Shinobi Inc.?

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