Question

Top Sound International designs and sells high-end stereo equipment for auto and home use. Engineers notified management in December 2021 of a circuit flaw in an amplifier that poses a potential fire hazard. Further investigation indicates that a product recall is probable, estimated to cost the company $4 million. The fiscal year ends on December 31.Required:Should this contingent liability be reported, disclosed in a note only, or neither.

Answer 1

This should be reported

Step-by-step explanation:

A contingent liability can be described as a liability that likely to be incurred at it depends on the outcome of an uncertain future event.

The condition for reporting a contingent liability is that its contigency must be likely and it is possible to reasonably estimate the amount of the liability.

Since it is indicated in the question that investigation indicates that a product recall is probable, ant it is estimated to cost the company $4 million, it therefore implies that the contigent liability meets the two conditions for it to be reported.