Sound Audio manufactures and sells audio equipment for automobiles. Engineers notified management in December 2021 of a circuit flaw in an amplifier that poses a potential fire hazard. An intense investigation indicated that a product recall is virtually certain, estimated to cost the company $8.0 million. The fiscal year ends on December 31. Required: Should this loss contingency be accrued, only disclosed, or neither? What loss, if any, should Sound Audio report in its 2021 income statement? What liability, if any, should Sound Audio report in its 2021 balance sheet?
Sound Audio manufactures and sells audio equipment for automobiles. Engineers notified management in December 2021 of a circuit flaw in an amplifier that poses a potential fire hazard. An intense investigation indicated that a product recall is virtually certain, estimated to cost the company $8.0 million. The fiscal year ends on December 31.
Required:
- Should this loss contingency be accrued, only disclosed, or neither?
- What loss, if any, should Sound Audio report in its 2021 income statement?
- What liability, if any, should Sound Audio report in its 2021 balance sheet?
1 Loss contingency _______________________
2 Loss _________ million
3 Liability _________ million
- Prepare any
journal entry needed.
Journal entry worksheet
Record the liability on product recall.
Transaction General Journal Debit Credit
1 ___________________________ ____________ _________
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