Merck & Co. included the following footnote in its 2016 Form 10-K:
Environmental Matters
The Company believes that there are no compliance issues associated with applicable environmental laws and regulations that would have a material adverse effect on the Company. The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites. Expenditures for remediation and environmental liabilities were $11 million in 2016, and are estimated at $44 million in the aggregate for the years 2017 through 2021. These amounts do not consider potential recoveries from other parties. The Company has taken an active role in identifying and accruing for these costs and in management's opinion, the liabilities for all environmental matters that are probable and reasonably estimable have been accrued and totaled $83 million and $109 million at December 31, 2016 and 2015, respectively. These liabilities are undiscounted, do not consider potential recoveries from other parties and will be paid out over the periods of remediation for the applicable sites, which are expected to occur primarily over the next 15 years. Although it is not possible to predict with certainty the outcome of these matters, or the ultimate costs of remediation, management does not believe that any reasonably possible expenditures that may be incurred in excess of the liabilities accrued should exceed $64 million in the aggregate. Management also does not believe that these expenditures should result in a material adverse effect on the Company's financial position, results of operations, liquidity, or capital resources for any year.
Required:
a. How does Merck account for environmental liabilities that are probable and reasonably estimable? At December 31, 2016, how much were these liabilities?
b. How does Merck account for environmental liabilities that are reasonably possible? At December 31, 2016, how much were these liabilities?
c. The footnote mentions $83 million and $44 million as estimated future expenditures. Explain what each of these amounts represents and why they differ.
d. Use the financial statement effects template below, to record Merck's 2016 remediation and environmental expenditures, assuming that the liability had already been accrued on Merck's books.

Question

Merck & Co. included the following footnote in its 2016 Form 10-K: 
Environmental Matters
The Company believes that there are no compliance issues associated with applicable environmental laws and regulations that would have a material adverse effect on the Company. The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites. Expenditures for remediation and environmental liabilities were $11 million in 2016, and are estimated at $44 million in the aggregate for the years 2017 through 2021. These amounts do not consider potential recoveries from other parties. The Company has taken an active role in identifying and accruing for these costs and in management's opinion, the liabilities for all environmental matters that are probable and reasonably estimable have been accrued and totaled $83 million and $109 million at December 31, 2016 and 2015, respectively. These liabilities are undiscounted, do not consider potential recoveries from other parties and will be paid out over the periods of remediation for the applicable sites, which are expected to occur primarily over the next 15 years. Although it is not possible to predict with certainty the outcome of these matters, or the ultimate costs of remediation, management does not believe that any reasonably possible expenditures that may be incurred in excess of the liabilities accrued should exceed $64 million in the aggregate. Management also does not believe that these expenditures should result in a material adverse effect on the Company's financial position, results of operations, liquidity, or capital resources for any year.
Required:
a. How does Merck account for environmental liabilities that are probable and reasonably estimable? At December 31, 2016, how much were these liabilities?
b. How does Merck account for environmental liabilities that are reasonably possible? At December 31, 2016, how much were these liabilities?
c. The footnote mentions $83 million and $44 million as estimated future expenditures. Explain what each of these amounts represents and why they differ.
d. Use the financial statement effects template below, to record Merck's 2016 remediation and environmental expenditures, assuming that the liability had already been accrued on Merck's books.

Quizplus · Accepted Answer

The Answer of Merck & Co. included the following footnote in its 2016 Form 10-K: 
Environmental Matters
The Company believes that there are no compliance issues associated with applicable environmental laws and regulations that would have a material adverse effect on the Company. The Company is also remediating environmental contamination resulting from past industrial activity at certain of its sites. Expenditures for remediation and environmental liabilities were $11 million in 2016, and are estimated at $44 million in the aggregate for the years 2017 through 2021. These amounts do not consider potential recoveries from other parties. The Company has taken an active role in identifying and accruing for these costs and in management's opinion, the liabilities for all environmental matters that are probable and reasonably estimable have been accrued and totaled $83 million and $109 million at December 31, 2016 and 2015, respectively. These liabilities are undiscounted, do not consider potential recoveries from other parties and will be paid out over the periods of remediation for the applicable sites, which are expected to occur primarily over the next 15 years. Although it is not possible to predict with certainty the outcome of these matters, or the ultimate costs of remediation, management does not believe that any reasonably possible expenditures that may be incurred in excess of the liabilities accrued should exceed $64 million in the aggregate. Management also does not believe that these expenditures should result in a material adverse effect on the Company's financial position, results of operations, liquidity, or capital resources for any year.
Required:
a. How does Merck account for environmental liabilities that are probable and reasonably estimable? At December 31, 2016, how much were these liabilities?
b. How does Merck account for environmental liabilities that are reasonably possible? At December 31, 2016, how much were these liabilities?
c. The footnote mentions $83 million and $44 million as estimated future expenditures. Explain what each of these amounts represents and why they differ.
d. Use the financial statement effects template below, to record Merck's 2016 remediation and environmental expenditures, assuming that the liability had already been accrued on Merck's books.