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(Solved) 1. Consider the following dates in the evolution of the Pentium


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1. Consider

 


 

the following dates in the evolution of the Pentium chip flaw

 

during 1994:

 

June 30:

 

Intel discovered the flaw

 

October 31:

 

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?

 

2. At

 


 

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

 

financial statements?

 

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

 

in 1994?

 


 

 


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