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 $46 million. Now, though, while management feels it is probable the company will incur substantial costs, all discussions indicate that $46 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 $36 million $26 million $16 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.

Answer 1

Reg 1 and 2 Req 3 to 5 Prepare the necessary journal entries. (If no entry is required for a transaction/event, select "No journal entry requi first account field. Enter your answers in whole dollars.) Transaction No Debit General Journal Credit 1 01 23,809,500 Loss-product recall Liability-product recall 23,809,500 2 02 1,190,500 Interest expense Liability-product recall 1,190,500 3 03 25,000,000 Liability-product recall Loss-product recall Cash 23809500 1190500