Top Sound International designs and sells high-end stereo equipment for auto and home use. Engineers notified management in December 2021 of a circuit flaw in an amplifier that poses a potential fire hazard. Further investigation indicates that a product recall is probable, estimated to cost the company $4 million. The fiscal year ends on December 31.

Required:

1. Should this contingent liability be reported, disclosed in a note only, or neither? Explain.

2. What loss, if any, should Top Sound report in its 2021 income statement?

3. What liability, if any, should Top Sound report in its 2021 balance sheet?

4. What entry, if any, should be recorded?