1. 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 $3.1 million. The fiscal year ends on December 31.

Should this contingent liability be reported, disclosed in a note only, or neither? What loss is to be reported? Liability to be reported? What journal entry should be recorded, if any?