Sound Audio manufactures and sells audio equipment for automobiles. Engineers notified management in December 2024 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 $2 million. The fiscal year ends on December 31. Required: Should this loss contingency be accrued, only disclosed, or neither? What loss, if any, should Sound Audio report in its 2024 income statement? What liability, if any, should Sound Audio report in its 2024 balance sheet? Prepare any journal entry needed.

Sound Audio manufactures and sells audio equipment for automobiles. Engineers notified management in December 2024 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 $2 million. The fiscal year ends on December 31. Required: Should this loss contingency be accrued, only disclosed, or neither? What loss, if any, should Sound Audio report in its 2024 income statement? What liability, if any, should Sound Audio report in its 2024 balance sheet? Prepare any journal entry needed.

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter5: The Income Statement And The Statement Of Cash Flows

Section: Chapter Questions

Problem 4MC

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Required:

Should this loss contingency be accrued, only disclosed, or neither?
What loss, if any, should Sound Audio report in its 2024 income statement?
What liability, if any, should Sound Audio report in its 2024 balance sheet?
Prepare any journal entry needed.

Definition Definition Method of recording financial transactions in the book of original entry by debiting and crediting the accounts affected by a transaction using the golden rules of accrual accounting.

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