For each of the following situations, determine whether the company should
(a) Report a liability on the balance sheet,
(b) Disclose a contingent liability, or
(c) Not report the situation. Justify and explain your conclusions.
1. An automobile company introduces a new car. Past experience demonstrates that lawsuits will be filed as soon as the new model is involved in any accidents. The company can be certain that at least one jury will award damages to people injured in an accident.
2. A research scientist determines that the company’s best-selling product may infringe on another company’s patent. If the other company discovers the infringement and files suit, your company could lose millions.
3. As part of land development for a new housing project, your company has polluted a natural lake. Under state law, you must clean up the lake once you complete development. The development project will take five to eight years to complete. Current estimates indicate that it will cost $2 to $3 million to clean up the lake.
4. Your company has just been notified that it lost a product liability lawsuit for $1 million that it plans to appeal. Management is confident that the company will win on appeal, but the lawyers believe that it will lose.
5. A key customer is unhappy with the quality of a major construction project. The company believes that the customer is being unreasonable but, to maintain goodwill, has decided to do $250,000 in repairs next year.