Question

Sound Audio manufactures and sells audio equipment for automobiles Engineers notified management in December 2021 of a circuit flaw in an amplifier that poses a potential fire hazard. An intense investigation indicated that a product recall is virtually certain, estimated to cost the company $70 million. The fiscal year ends on December 31 Required: 1. Should this loss contingency be accrued, only disclosed, or neither? 2. What loss, if any, should Sound Audio report in its 2021 income statement? 3. What liability, if any, should Sound Audio report in its 2021 balance sheet? 4. Prepare any journal entry needed Complete this question by entering your answers in the tabs below. Reg 1 to 3 Reg 4 Should this loss contingency be accrued, only disclosed, or neither? What loss and liability, if any, should Sound Audio report in its 2021 income statement and balance sheet respectively? (Enter your answers in millions rounded to 1 decimal place (.e., 5,500,000 should be entered as 5.5).) 1. Loss contingency

Answer 1

1 to 3 :

1.	Loss Contingency	To be accrued & disclosed
2.	Loss	$ 7 million
3.	Liability	$ 7 million

As the loss contingency is vitually certain, and is also capable of being reasonably estimated, it should be accrued in the financial statements as well as disclosed in the notes on accounts.A liability is accrued if it is both probable that the confirming event ( product recall ) will occur and the amount can be at least reasonably estimated.

4.

Event	General Journal	Debit	Credit
1.	Loss : Produt Recall	7,000,000
	Liability : Product Recall		7,000,000