The following three independent sets of facts relate to contingent liabilities: 1. In November of the current year, an automobile manufacturing company recalled all pickup trucks manufactured during the past two years. A flaw in the battery cable was discovered and the recall provides for replacement of the defective cables. The estimated cost of this recall is $3.1 million. 2. The EPA has notified a company of violations of environmental laws relating to hazardous waste. These actions seek cleanup costs, penalties, and damages to property. The company is reasonably certain there will be cost associated with the cleanup, but cannot estimate the amount. The cleanup cost could be as high as $4,110,000 or as little as $610,000 and insurance could reimburse all or part of the cost. There is no way to more accurately estimate the cost to the company at this time. 3. Holland Company does not carry property damage insurance because of the cost. The company has suffered substantial losses each of the past three years. However, it has had no losses for the current year. Management thinks this is too good to be true and is sure there will be significant losses in the coming year. However, the exact amount cannot be determined. Required a. What are three categories of contingent liabilities? b. For each item in the preceding list, determine the correct accounting treatment. Prepare any required journal entries. (If no entry required for a transaction/event, select "No journal entry required" in the first account field.) View transaction list Journal entry worksheet BC Record the warranty expense for event 1. Note: Enter debits before credits Event General Journal Debit Credit To support herself while attending school, Daun Deloch sold stereo systems to other students. During the first year of operations, Daun purchased the stereo systems for $280,000 and sold them for $390,000 cash. She provided her customers with a one-year warranty against defects in parts and labor. Based on industry standards, she estimated that warranty claims would amount to 2 percent of sales. During the year, she paid $4,220 cash to replace a defective tuner. Required Prepare an income statement and statement of cash flows for Daun's first year of operation. (Statement of Cash Flows only, items to be deducted must be indicated with a negative amount.) DAUN'S STEREOS Income Statement DAUN'S STEREOS Statement of Cash Flows Cash flow from operating activities: Net cash flow from operating activities Cash flows from investing activities Cash flows from financing activities Net change in cash Ending cash balance What is Daun's total warranties liability at the end of the accounting period? Total warranties liability Required Use the following information to prepare a classified balance sheet for Alpha Co. at the end of Year 1. Accounts receivable Accounts payable Cash Common stock tand Long-term notes payable Merchandise inventory Retained earnings $43, 190 9.OBO 14,970 42,000 27,470 23,550 29, 200 40,200 ALPHA CO. Classified Balance Sheet As of December 31, Year 1 Current assets Total current assets Property, plant and equipment Total current assets Property, plant and equipment Total property, plant and equipment Total assets Liabilities and Stockholders' Equity Current liabilities ances Long-term liabilities Total liabilities Stockholders' equity Total stockholders' equity Total liabilities and stockholders' equity