Question

Contingent Liabilities

The following note accompanied the financial statements for Goodyear Tire and Rubber Company (GT):

We are a defendant in numerous lawsuits alleging various asbestos-related personal injuries purported to result from alleged exposure to certain asbestos products manufactured by us or present in certain of our facilities. Typically, these lawsuits have been brought against multiple defendants in state and federal courts. To date, we have disposed of approximately 109,500 claims by defending and obtaining the dismissal thereof or by entering into a settlement. The sum of our accrued asbestos-related liability, . . . including legal costs totaled approximately $458 million . . .

a. Illustrate the effects on the accounts and financial statements of recording the contingent liability of $458,000,000. If no account or activity is affected, select "No effect" from the dropdown list and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts.

Statement of Cash Flows

Balance Sheet

Income Statement

Assets

=

Liabilities

+

Stockholders' Equity

No effect

=

Contingent product & Tort claims payable

+

Retained earnings

Statement of Cash Flows

Income Statement

No effect

Litigation expenses and losses

b. If a contingent liability is probable and the amount of the liability can be reasonably estimated, it is accrued in the financial statements and disclosed in a footnote to the financial statements . The liability is recorded by increasing an expense and by increasing a liability .

Answer 1

A contingent liability is a potential liability that may occur, depending on the outcome of an uncertain future event. A contingent liability is recorded in the accounting records if the contingency is probable and the amount of the liability can be reasonably estimated. If both conditions are not met, the liability may be disclosed in a footnote on the financial statements or not reported at all.

a) Since, contingent liability is not probable in this case. Hence it would be disclosed in footnote on the financial statement. So no account got impacted and no effect on cash flow statement.

b) Since, contingency is probable and the amount of the liability can be reasonably estimated. Hence contingent liability will be recorded.

Entry :-

Contingent product & Tort claims (expense) Dr. $458,000,000

Contingent product & Tort claims Payable Cr.   $458,000,000

(Being contingent liability recorded)

Income Statement :-

Contingent product & Tort claims -> increase by $458,000,000

Retained earning -> Decrease by $458,000,000

Balance Sheet :-

Liabilities -> Increase by $458,000,000

Stockholders' Equity -> Decrease by $458,000,000

In Cash flow statement :-

Since no cash paid for this liability. Hence in cash flow from operating activities, it will be added to net income as non cash expenses. And apart from this no other effect will be there in cash flow statement.