Chapter 8, Problem 8.9S

(Learning Objective 5: Interpret a company’s contingent liabilities) Martinson Cycles, Inc., a motorcycle manufacturer, included the following note in its annual report:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7 (In Part): Commitments and Contingencies

The Company self-insures its product liability losses in the United States up to $3.8 million (catastrophic coverage is maintained for individual claims in excess of $3.8 million up to $26.3 million). Outside the United States, the Company is insured for product liability up to $26.3 million per individual claim and in the aggregate.

  1.    Why are these contingent (versus real) liabilities?

  2.    In the United States, how can the contingent liability become a real liability for Martinson? What are the limits to the company’s product liabilities in the United States?

  3.    How can a contingency outside the United States become a real liability for the company? How does Martinson’s potential liability differ for claims outside the United States?