The Heinrich Tire Company recalled a tire in its subcompact line in December 2021. Costs associated with the recallwere originally thought to approximate $45 million. Now, though, while management feels it is probable the companywill incur substantial costs, all discussions indicate that $45 million is an excessive amount. Based on prior recalls inthe industry, management has provided the following probability distribution for the potential loss: (FV of $1. PV of $1.EVA of $1. PVA of $1. FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)Loss Amount$35 million$25 million$15 millionProbability20%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 4%.Required:1. & 2. By the traditional approach to measuring loss contingencies, what amount would Heinrich record at the end of2021 for the loss and contingent liability? For the remainder of this problem, apply the expected cash flow approachof SFAC No. 7. Estimate Heinrich's liability at the end of the 2021 fiscal year.3. to 5. Prepare the necessary journal entries.

A Liability that may or may not occur in the near future depends on the result of a specific event…

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,

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,

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Deferred Tax

Deferred tax is an estimated future tax which is made while preparing accounts. It is estimated as a result of past and present transactions in the financial statements. It is not the actual tax which needs to be paid or refundable from the revenue authority, it is an accounting entry. It exists because of the difference between accounting profits and taxable profits.

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 $45 million. Now, though, while management feels it is probable the company
will incur substantial costs, all discussions indicate that $45 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.
EVA of $1. PVA of $1. FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
Loss Amount
$35 million
$25 million
$15 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 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.

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