Question

In: Accounting

The Heinrich Tire Company recalled a tire in its subcompact line in December 2018. Costs associated...

The Heinrich Tire Company recalled a tire in its subcompact line in December 2018. Costs associated with the recall were originally thought to approximate $55 million. Now, though, while management feels it is probable the company will incur substantial costs, all discussions indicate that $55 million is an excessive amount. Based on prior recalls in the industry, management has provided the following probability distribution for the potential loss: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Loss Amount Probability
$ 45 million 20%
$ 35 million 50%
$ 25 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 8%.

Required:
1. & 2. By the traditional approach to measuring loss contingencies, what amount would Heinrich record at the end of 2018 for the loss and contingent liability? 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. to 5. Prepare the necessary journal entries.

The Heinrich Tire Company recalled a tire in its subcompact line in December 2018. Costs associated with the recall were originally thought to approximate $55 million. Now, though, while management feels it is probable the company will incur substantial costs, all discussions indicate that $55 million is an excessive amount. Based on prior recalls in the industry, management has provided the following probability distribution for the potential loss: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Solutions

Expert Solution


Related Solutions

The Heinrich Tire Company recalled a tire in its subcompact line in December 2018. Costs associated...
The Heinrich Tire Company recalled a tire in its subcompact line in December 2018. Costs associated with the recall were originally thought to approximate $47 million. Now, though, while management feels it is probable the company will incur substantial costs, all discussions indicate that $47 million is an excessive amount. Based on prior recalls in the industry, management has provided the following probability distribution for the potential loss: (FV of $1, PV of $1, FVA of $1, PVA of $1,...
The Heinrich Tire Company recalled a tire in its subcompact line in December 2018. Costs associated...
The Heinrich Tire Company recalled a tire in its subcompact line in December 2018. Costs associated with the recall were originally thought to approximate $47 million. Now, though, while management feels it is probable the company will incur substantial costs, all discussions indicate that $47 million is an excessive amount. Based on prior recalls in the industry, management has provided the following probability distribution for the potential loss: (FV of $1, PV of $1, FVA of $1, PVA of $1,...
Bowie Company uses a calendar year and the straight line depreciation method. On December 31, 2018,...
Bowie Company uses a calendar year and the straight line depreciation method. On December 31, 2018, after adjusting entries were posted, Bowie Company sold a machine which was originally purchased on January 1, 2015. The historical cost was $21,500, the salvage value assumed was $1,500 and the original estimated life was five years.. It was sold for $5,400 cash. Using this information, how much should be recorded on December 31 for the Gain or (Loss)? Round to whole dollars.
Bowie Company uses a calendar year and the straight line depreciation method. On December 31, 2018,...
Bowie Company uses a calendar year and the straight line depreciation method. On December 31, 2018, after adjusting entries were posted, Bowie Company sold a machine which was originally purchased on January 1, 2015. The historical cost was $23,500, the salvage value assumed was $2,000 and the original estimated life was five years.. It was sold for $3,200 cash. Using this information, how much should be recorded on December 31 for the Gain or (Loss)? Round to whole dollars.
Bowie Company uses a calendar year and the straight line depreciation method. On December 31, 2018,...
Bowie Company uses a calendar year and the straight line depreciation method. On December 31, 2018, after adjusting entries were posted, Bowie Company sold a machine which was originally purchased on January 1, 2015. The historical cost was $23,000, the salvage value assumed was $1,000 and the original estimated life was five years.. It was sold for $4,400 cash. Using this information, how much should be recorded on December 31 for the Gain or (Loss)? Round to whole dollars.
The Roadking Tire Company produces the Roadrunner tire. The annual demand at its DC is 17,400...
The Roadking Tire Company produces the Roadrunner tire. The annual demand at its DC is 17,400 tires. The transport and handling costs are $2,600 each time a shipment of tires is ordered at the distribution center. Orders are filled in 10 days. The annual carrying cost is $3.75 per tire. Assume the company works 260 days per year. Determine the optimal order quantity, and the minimum total annual cost. Compute the optimal number of orders to place per year. Compute...
At the end of its first year of operations on December 31, 2018, the Hondo Company...
At the end of its first year of operations on December 31, 2018, the Hondo Company reported the following information for the year: (Assume any deferred tax assets are more likely than not to be realized). Pretax income for financial reporting purposes $360,000 Municipal bond interest revenue on State of Texas bonds 12,000 Warranty expense for financial reporting purposes Warranty repair costs during period 30,000 10,000 Excess of MACRS Depreciation for tax purposes above straight line for financial reporting purposes...
At the end of its first year of operations on December 31, 2018, the Skyway Company...
At the end of its first year of operations on December 31, 2018, the Skyway Company reported taxable income of $30,000 and a pretax financial loss of $40,000. Differences between taxable income and pretax financial income included:Environmental fine from the EPA = $20,000Warranty costs expensed for accounting purposes in excess of cash paid for warranty costs = $50,000(Those warranty costs are expected to be paid in 2019.) The enacted tax rates for 2018 and 2019 are 30% and 34%, respectively.REQUIRED:(a)...
Brokeback Towing Company is at the end of its accounting year, December 31, 2018. The following...
Brokeback Towing Company is at the end of its accounting year, December 31, 2018. The following data that must be considered were developed from the company’s records and related documents: On July 1, 2018, a two-year insurance premium on equipment in the amount of $800 was paid and debited in full to Prepaid Insurance on that date. Coverage began on July 1. At the end of 2018, the unadjusted balance in the Supplies account was $1,200. A physical count of...
. At December 31, 2018, Garvey Company reported this information on its balance sheet.                          Accounts...
. At December 31, 2018, Garvey Company reported this information on its balance sheet.                          Accounts Receivable                             $ 960,000             Less: Allowance for Doubtful Accounts                       78,000     During 2019, the company had the following transactions related to receivables.             1. Sales on account                                                          $3,600,000             2. Sales returns and allowances                                             50,000             3. Collection of account receivables                               3,100,000             4. Write-offs of account receivable deemed uncollectible                   92,000             5. Recovery of bad debts previously written off as uncollectible       28,000                     Instructions: (a)  Prepare the journal entries to record each of these five transactions. Assume that...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT