Question

me Heinrich Tire Company recalled a tire in its subcompact line in December 2021. Costs associated with the recall were originally nought to approximate $60 million. Now, though, while management feels it is probable the company will incur substantial costs, all iscussions indicate that $60 million is an excessive amount. Based on prior recalls in the industry, management has provided the ollowing probability distribution for the potential loss: (FV of $1. PV of $1. FVA of $1. PVA of $1. FVAD of $i and PVAD of $1 (Use appropriate factor(s) from the tables provided.) Probability 201 Loss Amount $50 million $40 million $30 million SAK 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 4% 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 is not complete. Complete this question by entering your answers in the tabs below. Red 1 and 2 Reg 3 to 5 By the traditional approach to measuring loss contingencies, what amount would Heinrich record at the end of 2021 for the < Prev 11 of 12 Next > le to search

Answer 1

1 &2:

Loss amount	Probability	Probable loss
50000000	20%	10000000
40000000	50%	20000000
30000000	30%	9000000
Total probable loss		39000000
PV of $1 ( 4% ,1year)		0.96154
Liability using SFAC no 7		37500060

3to5:

No	Transaction	General Journal	Debit	Credit
1	1	Loss- product recall	37500060
		Liability - product recall		37500060
2	2	Interest expense [39000000-37500060]	1499940
		Liability - product recall		1499940
3	3	Liability - product recall	39000000
		Loss- product recall [bal. fig.]
		Cash [Actual cost incurred]

*The actual cost incurred is not mentioned in the question given by you. Please the same in the cash column in the last journal entry and loss is the balancing figure.