Contingent Liabilities

The following note accompanied the financial statements for Goodyear Tire and Rubber Company (GT):

We are a defendant in numerous lawsuits alleging various asbestos-related personal injuries purported to result from alleged exposure to certain asbestos products manufactured by us or present in certain of our facilities. Typically, these lawsuits have been brought against multiple defendants in state and federal courts. To date, we have disposed of approximately 109,500 claims by defending and obtaining the dismissal thereof or by entering into a settlement. The sum of our accrued asbestos-related liability, . . . including legal costs totaled approximately $458 million . . .

a. Illustrate the effects on the accounts and financial statements of recording the contingent liability of $458,000,000. If no account or activity is affected, select "No effect" from the dropdown list and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts.

Statement of Cash Flows

Balance Sheet

Income Statement

Assets

=

Liabilities

+

Stockholders' Equity

No effect

=

Contingent product & Tort claims payable

+

Retained earnings

Statement of Cash Flows

Income Statement

No effect

Litigation expenses and losses

b. If a contingent liability is probable and the amount of the liability can be reasonably estimated, it is accrued in the financial statements and disclosed in a footnote to the financial statements . The liability is recorded by increasing an expense and by increasing a liability .