Sound Audio manufactures and sells audio equipment for automobiles. Engineers notified management December 2011 of a circuit flaw in an amplifier that poses a potential fire hazard. An intense investigation indicated that a product recall is virtually certain, estimated to cost the company $2 million. The fiscal year ends on December 31.

Required:
1. Should this loss contingency be accrued, disclosed only, or neither? Explain.
2. What loss, if any, should Sound Audio report in its 2011 income statement?
3. What liability, if any, should Sound Audio report in its 2011 balance sheet?
4. Prepare any journal entry needed.