Decorative Concrete produces a concrete overlay for residential and commercial concrete flooring. Customers have complained that one of the products results in excessive cracking. The likelihood the company will incur a loss on this product is probable and the amount of the loss is estimated to be somewhere between $1.5 and $3 million.1. Should this contingent liability be reported, disclosed in a note only, or both? Explain.2. What loss, if any, should Decorative Concrete report in its income statement?3. What liability, if any, should Decorative Concrete report in its balance sheet?4. What entry, if any, should be recorded?
What will be an ideal response?
1. The contingent liability is probable and reasonably estimable, so it must be reported. The details of the contingent liability should also be provided in a note to the financial statements.
2. When the loss is estimated within a range, the minimum amount of the loss, $1.5 million, should be reported in the company's 2021 income statement.
3. Similarly, a $1.5 million liability should be reported in the 2021 balance sheet.
4. The journal entry is as follows:
| Loss | 1,500,000 | ? |
| Contingent Liability | ? | 1,500,000 |
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