Sound Audio manufactures and sells audio equipment for automobiles. Engineers notified management in December 2016 of a circuit flaw in an amplifier that poses a potential fire hazard. An intense investigation indicated that a product recall is virtually certain, estimated to cost the company $10.5 million. The fiscal year ends on December 31.

Required:

1.

Should this loss contingency be accrued, only disclosed, or neither?

	Accrued
	Disclosed only
	Neither

2.What loss, if any, should Sound Audio report in its 2016 income statement? (Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)

3.

What liability, if any, should Sound Audio report in its 2016 balance sheet? (Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)

4.

Prepare any journal entry needed. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).) PLEASE CHOOSE FORM THE LIST BELOW TO JOURNALIZE Note: DEBITS BEFORE CREDITS No journal entry required Accounts receivable Allowance for uncollectible accounts Bad debt expense Bonds payable Cash Cost of goods sold Deferred rent revenue Deferred sales revenue Discount on notes payable Estimated warranty liability Interest expense Interest payable Interest receivable Interest revenue Liabilityproduct recall Lossproduct recall Notes payable Notes receivable Rent revenue Salaries and wages expense Salaries and wages payable Sales revenue Warranty expense a. Record the liability on product recall.