Contingent Liabilities Several independent items are listed for which the outcome of events is unknown at year-end.
a. A company has been sued by the federal government for price fixing. The company’s legal counsel believes that there will be an unfavorable verdict and has made an estimate of the probable loss.
b. A company is involved in an environmental cleanup lawsuit. The company’s legal counsel believes that the outcome may be unfavorable but has not been able to estimate the costs of the possible loss.
c. A company is involved in a trademark infringement suit. The company’s legal experts believe that an award of $750,000 in the company’s favor will be made.
d. A company offers a three-year warranty on sales of new computers. It believes that 6% of the computers will require repairs. e. A snack food manufacturer has included a coupon offer in the Sunday newspaper supplements. The manufacturer estimates that 30% of the 40¢ coupons will be redeemed.
1. Identify which of the items
(a) through (e) should be recorded at year-end.
2. Identify which of the items
(a) through (e) should not be recorded but should be disclosed in the year-end financial statements.