In November of the current year an automobile manufacturing company recalled all
ID: 2579974 • Letter: I
Question
In November of the current year an automobile manufacturing company recalled all pickup trucks 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.
The EPA has notified a company of violations of environmental laws relating to hazardous waste. These 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.
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.
For each item above, determine the correct accounting treatment. Prepare any required journal entries. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
** I already did the journal entry for the first entry. If you could help me with the last two that would be great!
The following three independent sets of facts relate to contingent liabilities:Explanation / Answer
Provison for contingent laiblity has to be created when
i) There is a present obligation as a result of past events
ii) There is a probable outflow of resources and
iii) A reliable estimate of the outflow can be made
Case 1, all the three conditions are satisfied and hence entity has to recognise provision of $ 2 million
Case 2, A reliable estmate of outflow of resources cannot be made and hence no provision is required
Case 3, There is no present obligation or there is no probable outflow and hence no provision is required
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