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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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Oct 15, 2019





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