Problem - Contingent Liabilities
Several items are listed for which the outcome of events is unknown at year- end.
a. A company offers a two- year warranty on sales of new computers. It believes that 4% of the computers will require repairs.'
b. The company is involved in a trademark infringement suit. The company's legal experts believe that an award of $ 500,000 in the company's favor will be made.
c. A company is involved in an environmental cleanup lawsuit. The company's legal counsel believes that the outcome may be unfavorable but has not been able to estimate the costs of the possible loss.
d. A soap manufacturer has included a coupon offer in the Sunday newspaper supplements. The manufacturer estimates that 25% of the 50- cent coupons will be redeemed.
e. A company has been sued by the federal government for price fixing. The company's legal counsel believes that there will be an unfavorable verdict and has made an estimate of the probable loss.
Please answer the following question - Identify which of the items (a) through (e) should be recorded at year- end and identify which of the items (a) through (e) should not be recorded but should be disclosed in the year- end financial statements.