Question

11 The Heinrich Tire Company recalled a tire in its subcompact line in December 2021. Costs associated with the recall were originally thought to approximate $62 million. Now, though, while management feels it is probable the company will incur substantial costs, all discussions indicate that $62 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.) 3.75 points Loss Amount $52 million $42 million $32 million Probability 20% 50% 30% 02:23:43 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 4%. eBook Print 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. Complete this question by entering your answers in the tabs below. Req 1 and 2 Req 3 to 5 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. (Enter your answers in whole dollars.) Traditional SFAC No. 7 Liability < Req 1 and 2 Req 3 to 5 >

Answer 1

1. & 2.

	Traditional	SFAC No.7
Liability	42,000,000	39,423,140

Working:

1. By the traditional approach Heinrich would accrue the more likely than not (more than 50%) amount $42 million.

2.

Loss amount	Probability	Probable loss
52,000,000	20%	10,400,000
42,000,000	50%	21,000,000
32,000,000	30%	9,600,000
Total probable loss		41,000,000
PV of $1 ( 4% ,1year)		0.96154
Liability using SFAC no.7		39,423,140

3. to 5.

Transaction	General Journal	Debit ($)	Credit ($)
1	Loss- product recall	39,423,140
	Liability - product recall		39,423,140
2	Interest expense (41,000,000 - 39,423,140)	1,576,860
	Liability - product recall		1,576,860
3	Liability - product recall	41,000,000
	Loss- product recall [Balancing figure]
	Cash [Actual cost incurred]

Note:The actual cost incurred is not mentioned in the question given by you.