Question

The following three independent sets of facts relate to contingent liabilities:

1. In November of the current year, an automobile manufacturing company recalled all pickup trucks manufactured during the past two years. A flaw in the battery cable was discovered and the recall provides for replacement of the defective cables. The estimated cost of this recall is $3.5 million.

2. The EPA has notified a company of violations of environmental laws relating to hazardous waste. These actions seek cleanup costs, penalties, and damages to property. The company is reasonably certain there will be cost associated with the cleanup, but cannot estimate the amount. The cleanup cost could be as high as $4,150,000 or as little as $650,000 and insurance could reimburse all or part of the cost. There is no way to more accurately estimate the cost to the company at this time.

3. Holland Company does not carry property damage insurance because of the cost. The company has suffered substantial losses each of the past three years. However, it has had no losses for the current year. Management thinks this is too good to be true and is sure there will be significant losses in the coming year. However, the exact amount cannot be determined. Required a. What are three categories of contingent liabilities?

Required
a. What are three categories of contingent liabilities?

b. For each item in the preceding list, determine the correct accounting treatment. Prepare any required journal entries. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
- Record the warranty expense for event 1.

- Record the fines associated with the violations of environmental laws for event 2.

- Record the current year losses for property damage in event 3.

Answer 1

sollution a

a.Three categories of contingent liabilities are as follows
1)	Probable Contengiency	The liability is probable in occurrence, and an estimate is available.
2)	Reasonable Possible	The liability is possible, but an estimate is not available
3)	Remote	Liability is not recorded or disclosed

sollution b

	Journal entries
Event	Account Title	Debit	credit
1	Warranty expense	$3.50
	Estimated warranty liability		$3.50
	(To Record the warranty expense)
2	No journal entry
	(since amount can not be Reliably Measure no provision made )
3	No journal entry
	(Since there is uncertainity of the event occuring
	which could give rise to liability -No proviion is made )