Recognition and Reporting of Contingent Liabilities}

OBJECTIVE 2 A list of alternative accounting treatments is followed by a list of potential contingent liabilities.

\section*{Alternative Accounting Treatments}

a. Estimate the amount of liability and record.

b. Do not record as a liability but disclose in the notes to the financial statements.

c. Neither record as a liability nor disclose in the notes to the financial statements.

\section*{Potential Contingent Liabilities}

1. Income taxes related to revenue included in net income this year but payable in a future year.

2. Potential costs in future periods associated with performing warranty services on products sold this period.

3. Estimated cost of future services under a product warranty related to past sales.

4. Estimated cost of future services under a product warranty related to future sales.

5. Estimated cost of pension benefits related to past employee services that has yet to be funded.

6. Potential loss on environmental cleanup suit against company; a court judgment against the company is considered less than probable but more than remotely likely.

7. Potential loss under class-action suit by a group of customers; during the current year, the likelihood of a judgment against the company has increased from remote to possible but less than probable.

8. Potential loss under an affirmative action suit by a former employee; the likelihood of a judgment against the company is considered to be remote.

9. Potential loss from a downturn in future economic activity.

10. Loss from out-of-court settlement of lawsuit that is likely to occur toward the end of next year.

\section*{Required:}

Match the appropriate accounting treatment with each of the potential liabilities listed above. Your answer should list the numbers 1 through 10 and, opposite each number, the letter of the appropriate accounting treatment.

\section*{Exercise