Hewlett-Packard’s Contingent Liability Following is an excerpt from Hewlett-Packard’s notes that accompanied its financial statements for the year ended October 31, 2006:

HP is party to, or otherwise involved in, proceedings brought by United States or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), known as “Superfund,” or state laws similar to CERCLA.

HP is also conducting environmental investigations or remediations at several current or former operating sites pursuant to administrative orders or consent agreements with state environmental agencies. It is our policy to apply strict standards for environmental protection to sites inside and outside the United States, even if not subject to regulations imposed by local governments.

The liability for environmental remediation and other environmental costs is accrued when it is considered probable and the costs can be reasonably estimated. We have accrued amounts in conjunction with the foregoing environmental issues that we believe was adequate as of October 31, 2006. These accruals were not material to our operations or financial position, and we do not currently anticipate material capital expenditures for environmental control facilities.

Required 1. Based on the excerpt, how did the company treat the contingency on its financial statements for the year ended December 31, 2006? What critieria were likely used to lead to that treatment?

2. What was the effect on the financial statements of the company’s treatment of the contingency?