The Heinrich Tire Company recalled a tire in its subcompact line in December 2018. Costs associated with
Question:
Loss Amount ...................Probability
$40 million.............................. 20%
$30 million.............................. 50%
$20 million.............................. 30%
An arrangement with a consortium of distributors requires that all recall costs be settled at the end of 2019. The risk-free rate of interest is 5%.
Required:
1. By the traditional approach to measuring loss contingencies, what amount would Heinrich record at the end of 2018 for the loss and contingent liability?
2. For the remainder of this problem, apply the expected cash flow approach of SFAC No. 7. Estimate Heinrich's liability at the end of the 2018 fiscal year.
3. Prepare the journal entry to record the contingent liability (and loss).
4. Prepare the journal entry to accrue interest on the liability at the end of 2019.
5. Prepare the journal entry to pay the liability at the end of 2019, assuming the actual cost is $31 million. Heinrich records an additional loss if the actual costs are higher or a gain if the costs are lower.
Distribution
The word "distribution" has several meanings in the financial world, most of them pertaining to the payment of assets from a fund, account, or individual security to an investor or beneficiary. Retirement account distributions are among the most...
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Related Book For
Intermediate Accounting
ISBN: 9781259722660
9th Edition
Authors: J. David Spiceland, James Sepe, Mark Nelson, Wayne Thomas
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