How would Kraft account for the contingent liability arising from a class action lawsuit alleging that it takes more than the advertised 3 ½ minutes to prepare Velveeta Microwaveable Shells & Cheese cups?

On the packaging of Velveeta Microwaveable Shells & Cheese cups, it says that it takes three and a half minutes to cook to the right consistency of cheese. However, for one upset Florida woman, it seems to be untrue. According to the South Florida Sun-Sentinel, Amanda Ramirez has filed a proposed class-action lawsuit accusing Kraft Heinz Foods Company of breaking both state and federal laws with its misleading labeling. According to Ramirez’s claim, the preparation of Velveeta Microwavable Shells & Cheese cups, which includes removing the top and cheese sauce packet as well as adding water, adds much more time to the process beyond the microwave time of three and a half minutes. According to the lawsuit, Ramirez would not have bought the Shells & Cheese cups if she had realized it would take longer to prepare than stated. She anticipates the class of victims to number more than 100 and is requesting more than $5 million in damages.

View a quick tutorial video about contingent liabilities at this link and then answer the following questions.

Questions

1. What is a contingent liability?
2. What are the three potential accounting treatments for a contingent liability?
3. In your opinion, how do you think Kraft will treat this contingent liability?

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