I’ll take a crack at answering my own questions in the liabilities case posted on Dec. 9, 2010.  I hope there are some graders out there!

  1. Initially record cash and a liability. As corn is produced record an asset (corn inventory). At the end of each accounting period, mark the corn inventory to market and recognize income. As the corn is delivered, reduce the liability at an amount equal to the original price, reduce the corn inventory at current market value and recognize a gain or loss for the difference.
  2. Initially record a gain equal to the amount of cash received.  If you grow any corn, record the corn inventory at market value and income equal to the difference between market value and the cost of growing the corn. Also, record a loss equal to the original amount of cash received with a corresponding credit to cash or a liability account depending on when payment occurs.
  3. Same accounting as (2) except recognize the loss at the amount of the tax on the corn harvested.
  4. Same accounting as (3) except recognize the loss at the amount of tax on corn harvested in excess of the limit.
  5. Same accounting as (4) except (instead of cash) initially record an asset account at the market value of the allowances.  Continue marking the allowances to market at the end of each accounting period, at the time sale, and at the time of delivery to the government, and recognize corresponding gains or losses.  When allowances are sold, record the cash received and reduce the allowances asset by the same amount.  When the allowances are used to satisfy the tax, reduce the asset account (at market value of the allowances) and the liability account for amount of the tax, and record the difference as a gain or loss.
  6. Same accounting as (5) except the tax is on emissions instead of corn.

Well, what do you think?  Any graders out there?  Bottom line is that there is no liability to NOT do something.