The following three independent sets of facts relate to contingent liabilities:

Question

The following three independent sets of facts relate to contingent liabilities: 1. In November of the current year an automobile manufacturing company recalled all pickup trucks 2. The EPA has notified a company of violations of environmental laws relating to hazardous waste. These manufactured during the past two years. A flaw in the battery cable was discovered and the recall provides for replacement of the defective cables. The estimated cost of this recall is $2 million actions seek cleanup costs, penalties, and damages to property. The company is reasonably certain there will be cost associated with the cleanup, but cannot estimate the amount. The cleanup cost could be as high as $4,000,000 or as little as $500,000 and insurance could reimburse all or part of the cost. There is no way to more accurately estimate the cost to the company at this time. 3. Holland Company does not carry property damage insurance because of the cost. The company has suffered substantial losses each of the past three years. However, it has had no losses for the current year. Management thinks this is too good to be true and is sure there will be significant losses in the coming year. However, the exact amount cannot be determined. Required a. What are three categories of contingent liabilities 2. 3

Explanation / Answer

a)

b)

b)

We record the contingent liability only when it is probable that loss will occur and we can reasonably estimate the amount of loss. If we can estimate the range of possible amounts, then we record the amount in the range that appears to be a better estimate than any other amount. If no amount is better, then we record the lowest amount in the range.

In the present case, no Entry is required as it is covered by insurance so no loss will be incurred.

c)

Since Amount cant be reasonably estimated no entries is required.

We have to disclose about this in the Foot Notes.

1. Recordation 2. Disclosure 3. No Treatment

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