Estimate Liability Arising from Loss Contingency
Worldwide Motors has produced "Stallions" for 10 years as of December 31, 2010. In a civil judgment against it on July 20, 2010, it was found that for the period of January 1, 2007, until the present, Worldwide was negligent in the design of the cars because the gasoline tank was positioned in the rear in such a way that it would explode upon impact with another car. On December 31, 2010 Worldwide estimated that its ultimate liability on the Stallions would total $9 million.
Required
Explain fully the accounting treatment Worldwide should give to the contingency on its financial statements as of December 31, 2010.