130. Required:

Show the summary journal entry that Goodyear recorded for the environmental cleanup and product liabilitiy/tort claim matters, described in the footnote disclosure.

Answer:

Environmental costs	66.5 million
Product tort and legal costs	218.7 million
Liability for environmental cleanup		66.5 million
Liability for product damage and tort claims		218.7 million

Learning Objective: 5 Level of Learning: 3

131. Required:

Briefly explain the authoritative basis on which the costs/obligations for environmental cleanup and product liabilitiy/tort claim matters were accrued in the financial statements.

Answer: SFAS #5 requires that contingent losses (and the corresponding obligations) be recorded (accrued) when the loss is both probable and the amount is known or reasonably estimable. Goodyear based its analysis on pending claims, historical experience and current trends, such as recent case verdicts with similar manufacturers, such as Firestone.

Learning Objective: 5 Level of Learning: 2

132. Required:

What is the point of the last paragraph of the Goodyear disclosure? Explain in terms of authoritative GAAP.

Answer: SFAS #5 indicates that outcomes of contingent losses that are remote (i.e., less than reasonably possible) need not be accrued or disclosed in the financial statements and footnotes. This is a catch-all statement by the company that any other possible losses not disclosed are excluded because of the remote probability assessed.

Learning Objective: 5 Level of Learning: 2

133. In its 2004 annual report to shareholders, Pemco Aviation Group Inc. included the following disclosure:

On October 6, 2003, the company's subsidiary, Pemco Aeroplex, filed suit against Certex of Alabama, an unincorporated division of Bridon American Corporation, for breach of contract and fraud with regard to the supply of deficient wire rope that is installed as aircraft flight control cables on KC-135 aircraft. The case, filed in the circuit court of Jefferson County, Alabama, was brought to trial and on September 20, 2004, a jury returned with a verdict in favor of the company in the amount of $7.5 million. The Court, upon a post-judgment motion filed by Certex, reduced the judgment to $2.5 million. Certex has appealed that Order to the Supreme Court of Alabama. The company believes the appeal is without merit and will continue to pursue final judgment on the Order. The company, pending appeal, has not recorded the $2.5 million favorable judgment.

Required:

What journal entries, if any, has Pemco recorded regarding this contingency. Explain their rationale.

Answer:

Pemco has not recorded a journal entry for the contingency. Although a jury returned a verdict in favor of Pemco's subsidiary, the case is still on appeal. Thus, this is a gain contingency for Pemco and should not be recorded until the case appeal has been ruled upon.

Learning Objective: 6 Level of Learning: 2