Question

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Exercise 13-17 (Algo) Contingency; product recall (LO13-5, 13-6] 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 $6.0 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 joumal 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).) 1. Loss contingency 2. Loss 3. Liability million million Reg 1 to 3 Req 4 >

Answer 1

1) Loss contingency 2) Loss 3) Liability 4) Journal Entry: Accrued $6.0 million $6.0 million (In millions) Transact. General Journal Debit Credit $6.0 Loss Product recall 1. Liability Product recall $6.0 Explanation: A firm must recognize a loss liability only when both the crieterias mentioned below are met: --> If it is probable that the confirming event will occur and --> The amount of loss can be at least reasonably estimated. If any one of the criteria is not met out, firm must estimate the amount of loss reasonably to the extent possible and disclose the same as "a disclosure note that describes the contigency". In the given case, both the criterias are met out because it is given that an intense investigation indicated that a product recall is virtually certain, estimated to cost the company $6.0 million. Accordingly, loss to the extent of $6.0 million and a liability for the same amount shall be recorded.