Question

Martinson Cycles, Inc., a motorcycle manufacturer, included the following note in its annual report: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 (In Part): Commitments and Contingencies The Company self-insures its product liability losses in the United States up to $3.8 million (catastrophic coverage is maintained for individual claims in excess of $3.8 million up to $26.3 million). Outside the United States, the Company is insured for product liability up to $26.3 million per individual claim and in the aggregate. Read the requirements 1. Why are these contingent (versus real) liabilities? These are contingent liabilities because at the time of the note Martinson Cycles, Inc. was not liable for any of these product losses. 2. In the United States, how can the contingent liability become a real liability for Martinson? What are the limits to the company's product liabilities in the United States? In the United States, the contingent liability can become a real liability if a user of the company's product suffers a loss for which the company is responsible. million and all individual losses above Martinson Cycles, Inc., must pay for all individual losses up to $ million

Answer 1

1.

These are contingent liabilities because at the time of note Martinson Inc. was not liable for any of these product losses

2.

In the united states, the contingent liability can become a real liability if a user of the company suffers a loss for which the company is responsible.

Martinson Inc must pay for individual losses up to $ 3.80 million and all individual losses above $ 26.30 million

(Its already given in the question that the coverage is maintained for individual claims in excess of $3.6 million and upto $26.30 million only. Any of the individual claims falling outside of the limits are not covered under the catastrophic coverage)