Question 1: At any of these dates, did Intel have a contingent liability as defined by SFAS #5?
June 30: Intel has discovered the flaw No contingent liability, no disclosure. According to Intel, a series of tests has showed that an error would occur only once every nine billion random calculations, or every 27,000 years for most users. Therefore, the chance that customers would encounter errors in calculations on their Pentium-driven PCs is slight and the event that customers would request chip replacement is remote. This means that the implementation of a replacement program is not probable, nor is the cost of such a program reasonably estimable because the theoretical participation rate is close to or equal to 0%.
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This first condition given by SFAS #5, however, is only a necessary but not sufficient condition for recognizing a contingent liability in the financial statements. SFAS #5 states further that in addition to a loss being probable, its amount must also be reasonably estimable. Obviously, this second condition is vague and leaves much up to the discretion of management. However, we feel (and we assume throughout this case that we have the same information as Intel’s management) that the amount is reasonably estimable, given the information we have. This being said, the expected value of the future loss that will actually be incurred is much harder to estimate, but we can, with the given information, assign a range of values to the loss, each associated with an uncertain probability of occurring. GAAP states that (and this is again coming from Accounting 202), should this be the case, companies should recognize as a loss contingency the lower bound of their estimated losses. We will therefore do this.
First, we must detail our assumptions and calculations that will lead to what we ultimately recommend recording as an expense. Given that we know that the cost to replace each chip (and its accompanying heat sinks) ranges from $50-$100, we will choose the lower bound of this in accordance with GAAP. Considering that the replacement program will extend to all