Learning Objective 5: Analyze a contingent liability at an automobile manufacturer) Ford Motor Company produces and sells the Ford Mustang Shelby GT350, whichFord markets as a track-ready car built to reach and sustain high speeds.Three of the 2016 Ford Mustang Shelby GT350 owners have filed a class action suit againstFord, alleging that these cars are not track-ready. The owners claim that the car goes into “limpmode” at high speeds due to high differential and trans temperatures. The limp mode slows thecar down to a greatly reduced speed. The slowdown of the engine occurs after 15 minutes orless of high-speed driving.Ford has reacted to the reports of limp mode by telling owners to purchase transmission anddifferential coolers (at the owner’s expense, not Ford’s).The 2017 model now includes transmission and differential coolers.An estimated 3,991 Shelby 350GTs could be covered by this class-action lawsuit.Requirements1. What is a contingent liability?2. What factors should Ford consider when deciding how to treat the Ford Mustang ShelbyGT350 contingent liability?3. In your opinion, how do you think Ford should handle this contingent liability in its financial reports (accrue, disclose, or do nothing)? Explain.

Question

Learning Objective 5: Analyze a contingent liability at an automobile manufacturer) Ford Motor Company produces and sells the Ford Mustang Shelby GT350, which
Ford markets as a track-ready car built to reach and sustain high speeds.
Three of the 2016 Ford Mustang Shelby GT350 owners have filed a class action suit against
Ford, alleging that these cars are not track-ready. The owners claim that the car goes into “limp
mode” at high speeds due to high differential and trans temperatures. The limp mode slows the
car down to a greatly reduced speed. The slowdown of the engine occurs after 15 minutes or
less of high-speed driving.
Ford has reacted to the reports of limp mode by telling owners to purchase transmission and
differential coolers (at the owner’s expense, not Ford’s).
The 2017 model now includes transmission and differential coolers.
An estimated 3,991 Shelby 350GTs could be covered by this class-action lawsuit.
Requirements
1. What is a contingent liability?
2. What factors should Ford consider when deciding how to treat the Ford Mustang Shelby
GT350 contingent liability?
3. In your opinion, how do you think Ford should handle this contingent liability in its financial reports (accrue, disclose, or do nothing)? Explain.

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