The State of Alabama Filed Suit Against Edwards Chemical Company

question 9

Multiple Choice

The State of Alabama filed suit against Edwards Chemical Company for violations of water pollution laws in 2018. During 2018, the company accrued a $300,000 loss for litigation. At the end of 2019, Edwards was able to settle with the State for $245,000. What entry should Edwards make when it pays the State in December, 2019?

• A) \[\begin{array} { | l | r | r | }
• \hline \text { Litigation Liability } & 300,000 & \\
• \hline \text { Gain on Litigation } & & 55,000 \\
• \hline \text { Cash } & & 245,000 \\
• \hline
• \end{array}\]
• B) \[\begin{array} { | c | r | r | }
• \hline \text { Litigation Liability } & 245,000 & \\
• \hline \text { Cash } & & 245,000 \\
• \hline
• \end{array}\]
• C) \[\begin{array} { | c | r | r | }
• \hline \text { Litigation Liability } & 300,000 & \\
• \hline \text { Recovery of a Loss } & & 55,000 \\
• \hline \text { Cash } & & 245,000 \\
• \hline
• \end{array}\]
• D) \[\begin{array} { | c | r | r | }
• \hline \text { Litigation Liability } & 300,000 & \\
• \hline \text { Retained Earnings } & & 55,000 \\
• \hline \text { Cash } & & 245,000 \\
• \hline
• \end{array}\]

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Definitions:

Positive Externalities

Benefits that result from a commercial activity experienced by others who are not directly involved in the transaction or activity.

Spillover Benefits

The positive effects experienced by third parties or the wider community from an economic transaction or activity, which are not reflected in the market price.

Pollution Abatement

Measures and processes implemented to reduce, control, or eliminate pollution from various sources in order to protect the environment.

Marginal Benefit

The extra enjoyment or value derived from the consumption of one more unit of a product or service.