Firestone Tire and Rubber Company (A)
Throughout most of the twentieth century, Firestone Tire and Rubber Company was one of the world’s leading manufacturers of tires for passenger cars and trucks. In 1978 the company was forced to recall some of its radial tires for alleged defects. The following pages provide excerpts from Firestone’s 1979 annual report, detailing the provisions and contingencies involved in the tire recall and related issues. The report of the company’s auditors is also provided.
Required
(a) Reconstruct summary journal entries for all of the activity in the “accrued liability for tire recall” account since it was established in 1978 (see Note 15). Assume that settlements with customers take the form of both cash refunds and tire replacements. Ignore tax effects.
(b) Explain why the company has provided for potential losses on the tire recall, but not for the lawsuits relating to the defective tires.
(c) What key messages are the auditors trying to convey with the auditors’ report?
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