The Heinrich Tire Company recalled a tire in its subcompact line in December 2013 Costs associated with the recall were originally thought to approximate $40 million Now, though, while management feels it is probable the company will incur substantial costs, all discussions indicate that $40 million is an excessive amount Based on prior recalls in the industry, management has provided the following probability distribution for the potential loss (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided) Loss Amount Probability $30 million 20 $20 million 50 $10 million 30 An arrangement with a consortium of distributors requires that all recall costs be settled at the end of 2014 The risk free rate of interest is 4 Required 1 Applying the expected cash flow approach of SFAC No 7 , estimate Heinrichs liability at the end of the 2013 fiscal year (Enter your answer in whole dollars ) 2 Prepare the journal entry to record the contingent liability (and loss) (If no entry is required for an event, select No journal entry required in the first account field Enter your answers in whole dollars )

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Posted on Sep 05, 2024

The Heinrich Tire Company recalled a tire in its subcompact line in December 2013. Costs associated with the recall were originally thought to approximate $40

The Heinrich Tire Company recalled a tire in its subcompact line in December 2013. Costs associated with the recall were originally thought to approximate $40 million. Now, though, while management feels it is probable the company will incur substantial costs, all discussions indicate that $40 million is an excessive amount. Based on prior recalls in the industry, management has provided the following probability distribution for the potential loss (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided):

Loss Amount	Probability
$30 million	20%
$20 million	50%
$10 million	30%

An arrangement with a consortium of distributors requires that all recall costs be settled at the end of 2014. The risk-free rate of interest is 4%.

Required:

1.	Applying the expected cash flow approach of SFAC No. 7, estimate Heinrichs liability at the end of the 2013 fiscal year. (Enter your answer in whole dollars.)

2.	Prepare the journal entry to record the contingent liability (and loss). (If no entry is required for an event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)