Reference no: EM1378103
Shown below are 3 independent situations. Answer the question at the end of each situation.
1. During 2010, Maverick Inc. became involved in a tax clash with the IRS. Maverick's attorneys have shown that they believe it is probable that Maverick will lose this dispute. They also believe that Maverick will have to pay IRS between $800,000 and $1,400,000. After the 2010 financial statements were issued, the case was settled with the IRS for $1,200,000. What amount, if any, could be reported as a liability for this contingency as of 31st December, 2010?
2. On 1st October, 2010, Holmgren Chemical was identified as a potentially responsible party by the Environmental Protection Agency. Holmgren's management along with its counsel has concluded that it is likely that Holmgren will be responsible for damages, and a reasonable approximation of these damages is $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 31st December, 2010?
3. Shinobi Inc. had a manufacturing plant in Darfur, which was destroyed in civil war. It is not certain who will compensate Shinobi for destruction, but Shinobi has been assured by governmental officials that it will get 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 could the contingency be reported in the financial statements of Shinobi Inc.?
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