Question

1. In November of the current year, an automobile manufacturing company recalled all pickup trucks manufactured during the past two years. Aflaw in the battery cable was discovered and the recall provides for replacement of the defective cables. The estimated cost of this recall is $2.1 million. 2 The EPA has notified a company of violations of environmental laws relating to hazardous waste. These actions seek cleanup costs. penalties, and damages to property. The company is reasonably certain there will be cost associated with the cleanup, but cannot estimate the amount. The cleanup cost could be as high as $4.010.000 or as little as $510,000 and Insurance could relmburse all or part of the cost. There is no way to more accurately estimate the cost to the company at this time. 3. Holland Company does not carry property damage Insurance because of the cost. The company has suffered substantial losses each of the past three years. However, it has had no losses for the current year. Management thinks this is too good to be true and is sure there will be significant losses in the coming year. However, the exact amount cannot be determined. Required a. What are three categories of contingent liabilities? ON- b. For each item in the preceding list, determine the correct accounting treatment. Prepare any required journal entries. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) View transaction et Journal entry worksheet А Record the warranty expense for event 1. Note: Enter debits before credit Event General Journal Debit Credit 1 Record entry Clear entry View general Journal

Answer 1

Requirement A:

Three categories of Contingent Liabilties are:

1. Probable
2. Possible
3. Remote

Requirement B:

Event	General Journal	Debit($)	Credit($)
1	Warranty Expense	2100000
	Warranty Liability		2100000
2	NO journal Required
3	NO journal Required

For Event 2 as the cost of estimating is not reliable, so a contingent liability is to disclosed in the notes to accounts as the event occuring is highly probable.

For Event 3 as there is no past event to incur any future liability, there is no need to disclose a contingent liability.