Reference no: EM132982435

Question: For each of the following situations, determine whether the company should (a) report a liability on the balance sheet, (b) disclose contingent liability or (c) not report the situation. Justify and explain your conclusions.

1 A car manufacturer introduces a new model. Past experience indicates that there will be some warranty expenses but because the desian of the car is so different from anything previously on the market the mount of the warranties cannot be reasonably estimated.

2 An employee has suggested that one of the company's best-selling products may infringe on another company's patent. If the other company discovers the infringement and files a lawsuit, the company could lose millions.

3 A company has polluted a river during the land development for a new construction project. Under environmental laws, clean-up action is required upon the completion of the project. The development project will take six to 10 years to complete. Current estimation of the cost to clean up the river amounts to $2-3 million.

4 The court announced a decision on a product liability lawsuit and found that the company is liable for $1 million. Management plans to appeal and believes that it will win. However, legal advice suggests that the chance of winning is minimal.

5 A key customer has complained about the quality of a major construction project and has a claim for compensation. While you believe the claim is unreasonable, to maintain the goodwill and reputation, the company has decided to make $250 000 in repairs next year without charge.

6 A company is being sued for a loss caused by a faulty product. However, while there is agreement that the product is the cause of the loss, all legal parties involved disagree about the dollar amount that was caused by the loss.