P9-9 Making Decisions about Contingent Liabilities LO9-4 For each of the followi

Question

P9-9 Making Decisions about Contingent Liabilities LO9-4 For each of the following situations, select whether the company should (a) report a liability on the balance sheet, (b) disclose a contingent liability in the footnotes, or (c) not report the situation. Situation Decision An automobile company introduces a new car. Past experience demonstrates that lawsuits will be filed as soon as the new model is involved in any accidents. The company can be certain that at least one jury will award damages to people injured in an accident, but it is unable to estimate the amount of any payout A research scientist determines that the company's best-selling product may infringe on another company's patent. If the other company discovers the infringement and files suit, which is unlikely, your 2, b) y could lose millions. As part of land development for a new housing project, your company has polluted a natural lake. Under state law, you must clean up the lake once you complete development. The development project will take five to eight years to complete. Current estimates indicate that it will cost S3 million to clean up the ake |(a) Your company has just been notified that it is being sued by a customer. The probability of the customer winning is deemed to be probable, but the amount of any loss cannot be reliably estimated A key customer is unhappy with the quality of a major construction project. The company believes that 5. the customer is being unreasonable but, to maintain goodwill, has decided to do $250,000 in repairs next year

Explanation / Answer

The following are the answers for the wrong ones shown in the image:

Situation2 C. NOt to report the situation, since the probability of the event to result in a cash outflow to the reporting entity is remote. Situation 4 b. Disclose a contingent liability since the liability is probable, but the amount of loss cannot be reliably estimated.

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