Analyzing Contingent and Other Liabilities

The following independent situations represent various types of liabilities. Analyze each situation and indicate which of the following is the proper accounting treatment for the company: (a) record a liability on the balance sheet, (b) disclose the liability in a financial statement footnote, (c) neither record nor disclose any liabilities.

1) A stockholder has filed a lawsuit against Windsor Corporation. Clinch's attorneys have reviewed the facts of the case. Their review revealed that similar lawsuits have never resulted in a cash award and it is highly unlikely that this lawsuit will either.

2) Sterling Company signed a 60-day, 10% note when it purchased items from another company.

3) The Environmental Protection Agency notifies Stark Industries that a state where it has a plant is filling a lawsuit for groundwater pollution against Shark and another company that has a plant adjacent to Stark's plant. Test results have not identified the exact source of the pollution. Stark's manufacturing process often produces by-products that can pollute groundwater.

4) Franklin Company manufactured and sold products to a retailer that later sold the products to consumers. Franklin Company will replace the product if it is found to be defective within 90 days of the sale to the consumer. Historically, 1.2% of the products are returned for placement.