Principles of Financial Accounting · free preview
Contingent Liabilities, Recording versus Disclosing Uncertainty
A contingent liability is a potential obligation whose recognition depends on two tests, loss probability and amount estimability, with probable and estimable losses recorded, possible losses disclosed, and remote losses ignored.
1. Defining the contingency
Defining the contingency
2. Warranties as the workhorse example
Warranties as the workhorse example
3. Lawsuits and the judgment zones
Lawsuits and the judgment zones
4. Guarantees and other quiet contingencies
Guarantees and other quiet contingencies
5. Two tests named
Which two tests decide whether a contingent liability is recorded?
6. Warranty computation
A company sells 10,000 units, expects 2 percent to need repair, and estimates average repair cost of 40 dollars. What warranty amount is recorded in the year of sale?
7. Possible lawsuit treatment
Legal counsel assesses a pending lawsuit as possible, with damages between 1 and 3 million dollars if the company loses. What does GAAP require?
8. Warranty liability clearing
A company recorded an 8,000 dollar warranty liability last year. This year customers claim repairs costing 5,500 dollars, all paid. Which entry records the repairs?
9. Warranty rate inputs
Expected warranty cost equals units sold times the ____ rate times average repair cost. One word.
10. Remote contingency handling
A contingency assessed as remote is neither recorded nor ____. One word.
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