The Heinrich Tire Company recalled a tire in its subcompact line in December 2021. Costs associated with the recall were originally thought to approximate $39 million. Now, though, while management feels it is probable the company will incur substantial costs, all discussions indicate that $39 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, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Loss Amount Probability $29 million 20% $19 million 50% $9 million 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 6%. 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. Req 1 and 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. Traditional SFAC No. 7 Liability Prepare the necessary journal entries. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.) Record the contingent liability (and loss). (Apply the expected cash flow approach of SFAC No. 7.) Transaction General Journal Debit Credit 01 Record the accrued interest on the liability at the end of 2022. (Apply the expected cash flow approach of SFAC No. 7.) Transaction General Journal Debit Credit 02 Record the payment of the liability at the end of 2022, assuming the actual cost is $19.6 million. Heinrich records an additional loss if the actual costs are higher or a gain if the costs are lower. (Apply the expected cash flow approach of SFAC No. 7.) Transaction General Journal Debit Credit 03
The Heinrich Tire Company recalled a tire in its subcompact line in December 2021. Costs associated with the recall were originally thought to approximate $39 million. Now, though, while management feels it is probable the company will incur substantial costs, all discussions indicate that $39 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, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
| Loss Amount | Probability |
| $29 million | 20% |
| $19 million | 50% |
| $9 million | 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 6%.
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
3. to 5. Prepare the necessary journal entries.
- Req 1 and 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.
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Prepare the necessary journal entries. (If no entry is required for a transaction/event, select "No
Record the contingent liability (and loss). (Apply the expected cash flow approach of SFAC No. 7.)
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Record the accrued interest on the liability at the end of 2022. (Apply the expected cash flow approach of SFAC No. 7.)
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Record the payment of the liability at the end of 2022, assuming the actual cost is $19.6 million. Heinrich records an additional loss if the actual costs are higher or a gain if the costs are lower. (Apply the expected cash flow approach of SFAC No. 7.)
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