Concept #1: Contingent Liabilities and Gains

Practice: Sumsang designs and sells smartphones for personal and commercial use. During the current year, the product engineers notified management of a flaw in the design that could cause the latest model to spontaneously combust. After a further investigation, it was noted that a product recall was probable, with an estimated cost to the company of $2,500,000. What influence might this information have on the current year financial statements?

Additional Problems
Review the following: Which of the following rules about contingent liabilities is NOT true? A) A contingent liability that can be estimated and is probable should be recorded. B) A contingent liability that cannot be estimated and is probable should be recorded. C) A contingent liability that cannot be estimated and is remote should not be recorded or disclosed. D) A contingent liability that can be estimated and is only reasonably possible should be disclosed but not recorded.
Lone Star Steakhouse has a contingent loss with a reasonably possible chance of occurrence. How should this contingency be reported? a. It should be accrued and recorded in the financial statements. b. It should be reported in the notes to the financial statements. c. It should be ignored until the actual loss materializes. d. It should either be recorded on the financial statements or reported in the notes to the financial statements.
When should a contingent liability be recorded in the face of the financial statements? A.When the future event is probable and can be reasonable estimated B.When the future event is remote C.When the future event is reasonable possible and can be reasonably estimated D.All of the above E.None of the above
Lone Star Steakhouse has a contingent loss with a  reasonably possible chance of occurrence. How should this contingency be reported? a. It should be accrued and recorded in the financial statements. b. It should be reported in the notes to the financial statements. c. It should be ignored until the actual loss materializes. d. It should either be recorded on the financial statements or reported in the notes to the financial statements.
Under what condition should a pending lawsuit be recognized as a liability on a company's balance sheet? a) The outcome is reasonably possible. b) The outcome is probable. c) The amount can be reasonably estimated. d) Both B and C.