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 $3.5 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 (i.e., 5,500,000 should be entered as 5.5).)

Answer 1

1. Yes, A liability is accured if it is both probable that the confirming event will come come and the amount can be at least reasonably estimated. If one or both of these criteria is not met, but there is at least a reasonable possibility that the loss will occur a disclosure note should describe the contingency. In this case, a liability is accured since both of criteria are met.

2. The loss would be $ 3.5 Million

3. The Liability would also be $ 3.5 Million

4.

Account Title and Explanation	Debit	Credit
Loss Product Recall	$ 3,500,000
Liability Product Recall		$ 3,500,000