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E13.13 (LO 3) (Contingencies) Presented below are three independent situations. Answer the question at the end of each situation. 1. During 2020, Salt-n-Pepa Inc. became involved in a tax dispute with the IRS. Salt-n-Pepa's attorneys have indicated that they believe it is probable that Salt-n-Pepa will lose this dispute. They also believe that Salt-n-Pepa will have to pay the IRS between $900,000 and $1,400,000. After the 2020 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, 2020? 2. On October 1, 2020, Jackson Chemical was identified as a potentially responsible party by the Environmental Protection Agency. Jackson's management along with its counsel have concluded that it is probable that Jackson will be responsible for damages, and a reasonable estimate of these dam- ages is $5,000,000. Jackson's insurance policy of $9,000,000 has a deductible clause of $500,000. How should Jackson Chemical report this information in its financial statements at December 31, 2020? 3. Etheridge Inc. had a manufacturing plant in Sudan, which was destroyed in the civil war. It is not certain who will compensate Etheridge for this destruction, but Etheridge has been assured by gov- ernmental officials that it will receive a definite amount for this plant. The amount of the compen- sation 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 Etheridge Inc

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