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the following dates in the evolution of the Pentium chip flaw
Intel discovered the flaw
Dr. Nicely posted information about the flaw on the
Internet and started an active discussion group
November 24: Article in Electrical Engineering Times appeared, a
story has been broadcast on CNN and articles have appeared in
the New York Times and Boston Globe
December 12: IBM announces that it has stopped shipments of its
computers with the flawed Pentium chip
At any of these dates, did Intel have a contingent liability as defined by
FAS No. 5?
the end of the December 17 meeting, what should Intel management
do? Should they expand their Pentium chip replacement program by (i)
covering more individuals; and/or (ii) providing or paying for some or all of
the (non-chip) incidental costs of replacing the defective chips?
3. Independent of your answer in question 2, assume that in December 1994,
Intel?s management decided to expand its program by offering to supply a
replacement chip to all purchases of a defective Pentium chip, regardless of
how they use it. Intel will provide a new chip free of charge, but will not pay
for any other costs. What expense/liability should Intel reflect on its 1994
4. How would your answer to question 3 change if Intel also offered to pay for
the labor and direct incidental costs in addition to offering to supply a new
chip to all individuals?
5. After the December 17 meeting, how should Intel?s management
communicate its decision to the financial markets? Should Intel file a form 8K?
6. On December 20, 1994, XYZ corp. had a chemical spill in a field adjacent to
their factory. They completed and paid cash for the immediate clean up prior
to their December 31 year-end. However, they have consulted with an
environmental engineering firm that indicated that there is a 90% chance
that XYZ will have to perform a further clean up in six months. The cost of
such a clean up would most likely be $100,000. If the weather is perfect
during the clean up, it could cost as little as $95,000. On the other hand,
there is a small chance that soil contamination could spread, increasing the
costs to $150,000. Should XYZ recognize a liability in their 1994 financial
statements? Assuming they do, what amount should be recognized? How
would XYZ record such a liability on their books? What impact would the
subsequent cash payment have if the liability were settled for the amount
accrued? What if the actual clean-up costs are more or less than was accrued
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