Interpreting an actual company’s contingent liabilities Farley Motors, Inc., a motorcycle manufacturer, included the following note (adapted) in its annual report:
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Notes to Consolidated Financial Statements |
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7 Commitments and Contingencies (Adapted) |
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The Company self insures its product liability losses in the United States up to $3,000,000. |
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Catastrophic coverage is maintained for individual claims in excess of $3,000,000 up to $25,000,000. |
Requirements
1. Why are these contingent (versus actual) liabilities?
2. How can a contingent liability become an actual liability for Farley Motors? What are the limits to the company’s product liabilities in the United States?.