RECOGNITION AND REPORTING OF CONTINGENT LIABILITIES A list of alternative accounting treatments is followed by a list of potential contingent liabilities.

Alternative Accounting Treatments

a. Estimate the amount of liability and record.

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

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

Potential Contingent Liabilities

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

. Income taxes related to cash collected, which will be included in both net income and taxable income in a future year.
. Estimated cost of future services under a product warranty related to past sales.
. Estimated cost of future services under a product warranty related to future sales.
. Estimated cost of pension benefits related to past employee services that has yet to be funded.
. Loss from out-of-court settlement of lawsuit that is likely to occur toward the end of next year.
. Potential loss on environmental cleanup suit against company; a court judgment against the company is considered less than probable but more than remotely likely.
. 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.
. Potential loss under an affirmative action suit by a former employee; the likelihood of a judgment against the company is considered to be remote.
. Potential loss from a downturn in future economic activity.
Required:
Match the appropriate accounting treatment with each of the potential liabilities listed below. Your answer should list the numbers 1 through 10 and, opposite each number, the letter of the appropriate accounting treatment.
Exercise