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During 2020, Bad Bunny, Inc

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During 2020, Bad Bunny, Inc. was sued by the EPA for leaving toxic waste on the land of its former headquarters. Bad Bunny’s attorneys have indicated that they believe it is very likely that Bad Bunny will lose this dispute. They also believe that Bad Bunny will have to pay the EPA between $5 million and $10 million. No particular amount in this range is considered more likely than any other. Bad Bunny has environmental insurance that may cover up to $5 million of this possible loss.

i. Briefly explain in complete sentences the relevant accounting issues and whether they should lead to recording of journal entries and recognition in the financial statements. If any footnote disclosure is needed, just summarize what should be disclosed, don’t write actual footnotes.

ii. Prepare any relevant journal entries as of 12/31/20, the company’s fiscal year-end date. If none are required, explain why.

iii. If anything needs to be reported on the 2020 income statement and balance sheet indicate what accounts and amounts will be reported. Make it clear what is on the income statement and what is on the balance sheet.

b) Total payroll of Walnut Co. on September 18, 2020, was $3,000,000, of which $400,000 represented amounts paid in excess of $130,000 to certain employees. The F.I.C.A. tax is 7.65% on an employee’s salaries and wages up to $130,000 and 1.45% in excess of $130,000. Federal income taxes withheld were $500,000, state income taxes withheld were $100,000, and voluntary employee contributions to retirement plans withheld were $150,000. Payment for all amounts will be made on September 25. Prepare the September 18 journal entry in proper form for the expenses and liabilities.