A list of possible liabilities follows: 

1. An automobile company recalled a particular car model because of a possible problem with the brakes. The company will pay to replace the brakes. 

2. A large retail store has a policy of refunding purchases to dissatisfied customers under a widely advertised “money-back, no questions asked” guarantee. 

3. A manufacturer offers a three-year warranty at the time of sale. 

4. To promote sales, a company offers prizes (such as a chance to win a trip) in return for a specific type of bottle cap. 

5. A local community has filed suit against a chemical company for contamination of drinking water. The community is demanding compensation, and the amount is uncertain. The company is vigorously defending itself. 

Instructions 

a. State whether you believe each of the above liabilities is certain, estimable, or contingent, and explain why. 

b. If you identify the liability as contingent in part (a), state what factors should be considered in determining if it should be recorded, disclosed, or neither recorded nor disclosed in the financial statements.