The Heinrich Tire Company recalled a tire in its subcompact line in December 2024. Costs associated with the recall were originally thought to approximate $55 million. Now, though, while management feels it is probable the company will incur substantial costs, all discussions indicate that $55 million is an excessive amount. Based on prior recalls in the industry, management has provided the following probability distribution for the potential loss: Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Loss Amount Probability $ 45 million 20% $35 million 50% $ 25 million 30% An arrangement with a consortium of distributors requires that all recall costs be settled at the end of 2025. The risk-free rate of interest is 8%. Required: 1. & 2. By the traditional approach to measuring loss contingencies, what amount would Heinrich record at the end of 2024 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 2024 fiscal year. 3. to 5. Prepare the necessary journal entries. 3) Record the contingent liability (and loss). (Apply the expected cash flow approach of SFAC No. 7.) 4) Record the accrued interest on the liability at the end of 2025. (Apply the expected cash flow approach of SFAC No. 7.) 5)Record the payment of the liability at the end of 2025, assuming the actual cost is $36.2 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.)
The Heinrich Tire Company recalled a tire in its subcompact line in December 2024. Costs associated with the recall were originally thought to approximate $55 million. Now, though, while management feels it is probable the company will incur substantial costs, all discussions indicate that $55 million is an excessive amount. Based on prior recalls in the industry, management has provided the following probability distribution for the potential loss: Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Loss Amount Probability $ 45 million 20% $35 million 50% $ 25 million 30% An arrangement with a consortium of distributors requires that all recall costs be settled at the end of 2025. The risk-free rate of interest is 8%. Required: 1. & 2. By the traditional approach to measuring loss contingencies, what amount would Heinrich record at the end of 2024 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 2024 fiscal year. 3. to 5. Prepare the necessary journal entries. 3) Record the contingent liability (and loss). (Apply the expected cash flow approach of SFAC No. 7.) 4) Record the accrued interest on the liability at the end of 2025. (Apply the expected cash flow approach of SFAC No. 7.) 5)Record the payment of the liability at the end of 2025, assuming the actual cost is $36.2 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.)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:The Heinrich Tire Company recalled a tire in its subcompact line in December 2024. Costs associated with the recall were
originally thought to approximate $55 million. Now, though, while management feels it is probable the company will incur
substantial costs, all discussions indicate that $55 million is an excessive amount. Based on prior recalls in the industry,
management has provided the following probability distribution for the potential loss:
Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)
Loss Amount
Probability
$ 45
million
20%
$35
million
50%
$ 25
million
30%
An arrangement with a consortium of distributors requires that all recall costs be settled at the end of 2025. The risk-free
rate of interest is 8%.
Required:
1. & 2. By the traditional approach to measuring loss contingencies, what amount would Heinrich record at the end of
2024 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 2024 fiscal year.
3. to 5. Prepare the necessary journal entries.
3) Record the contingent liability (and loss). (Apply the expected cash flow approach of SFAC No. 7.)
4) Record the accrued interest on the liability at the end of 2025. (Apply the expected cash flow approach of SFAC No. 7.)
5)Record the payment of the liability at the end of 2025, assuming the actual cost is $36.2 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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