Question

Dinoco Petroleum faces three potential contingency situations, described below. Dinocos fiscal year ends December 31,2024 , and it issues its 2024 financlal statements on March 15,2025

1. In the initial trial in October, Dinoco lost a $130 million lawsuit resulting from a dispute with a supplier. Although Dinoco feeis it is probable it will have to pay the full amount, the case is under appeal at the end of the year. Dinoco does not expect the case to have a material adverse effect on the company.
2. In November 2023, the state of Texas filed suit against Dinoco, seeking civil penalties and injunctive relief for violations of eavironmentsi laws regulating hazardous waste. On January 12, 2025, Dinoco reached a settiement with state authorities. Based upon discussions with legal counsel, it is probable that Dinoco will require $150 million to cover the cost of violations.
3. Dinoco is the plaintiff in a $300 million lawsuit filed against a customer for damages due to lost profits from rejected contracts and for unpaid recelvables. The case is in final appeal, and legal counsel advises that it is probable Dinoco will prevail and be awarded $150 million.
Required:
Determine the appropriate means of reporting each situation for the year ended December 31, 2024, and record any necessary entries. (if no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field, Enter your answers in dollars, not in millions. For example, $5.5 million should be entered as 5,500,000.)

Answer 1

Dinoco Petroleum should report a $130 million expense and liability for the lawsuit lost, a $150 million expense and liability for the environmental settlement, and no entry for the lawsuit where it is the plaintiff until the outcome is virtually certain.

Step-by-step explanation:

The content loaded question involves Dinoco Petroleum facing three potential contingency situations. The firm's fiscal year ended on December 31, 2024, and it must report these contingencies in its financial statements issued on March 15, 2025.

Situation 1:

Dinoco lost a lawsuit for $130 million, and although it's under appeal, it is probable they will have to pay. Since no material adverse effect is expected, Dinoco should recognize a liability and an expense for the full amount.

Situation 2:

For the environmental law violation case settled in January 2025 for $150 million, an accrual for the settlement should be made. The journal entry would be to record a liability and an expense for the settled amount.

Situation 3:

As the plaintiff in a lawsuit where it is probable that Dinoco will win $150 million, the potential receivable should not be recognized until it is virtually certain. Therefore, in this case, no journal entry is required as of December 31, 2024.