Question

The Heinrich Tire Company recalled a tire in its subcompact line in December 2021. Costs associated with the recall were originally thought to approximate $54 million. Now, though, while management feels it is probable the company will incur substantial costs, all discussions indicate that $54 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 $44 million $34 million $24 million Probability 20% 50% 30% An arrangement with a consortium of distributors requires that all recall costs be settled at the end of 2022. The risk-free rate of interest is 5%. Required: 1. & 2. By the traditional approach to measuring loss contingencies, what amount would Heinrich record at the end of 2021 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 2021 fiscal year. 3. to 5. Prepare the necessary journal entries. Complete this question by entering your answers in the tabs below. Req 1 and 2 Req 3 to 5 By the traditional approach to measuring loss contingencies, what amount would Heinrich record at the end of 2021 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 2021 fiscal year. (Enter your answers in whole dollars.) Traditional SFAC No. 7 Liability

Answer 1

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solution: Requirement : By the approach, Heinrich than anot (more than the traditional more - tikely $34 million. would accrue 5610) amoont * Loss - product recall tk or $ 34 000 000 To Liability - product recall $ 34 000 000 liability (and loss) of Requirement : Heinrich would $31428540 record a calculated contingent as follows: $44 000 000 6 34 000 000 24 000 000 x 204 X 30/ X 301- = $ 8 800 000 - 17000 000 = $ 7200 000 4 $33 000 000 4.95238 end of 2021 $31428540 Liability at & present value of 31 nat;:251. (from table 2) Pv