17 Contingencies & Commitments

Question 1

Describe the accounting treatment when a gain contingency is possible.

Answer 1

Disclose in a footnote.

Question 2

Describe the accounting treatment when a loss contingency is probable but not reasonably estimable.

Answer 2

Disclose in notes to the financial statements.

Question 3

Describe the accounting treatment when a gain contingency is probable.

Answer 3

Disclose in a footnote.

Question 4

Describe the accounting treatment when a loss contingency is remote.

Answer 4

No disclosure in the notes to the financial statements are required

Question 5

Describe the accounting treatment when a loss contingency is reasonably possible.

Answer 5

Disclose in notes to the financial statements.

Question 6

Describe the accounting treatment when a loss contingency is probable and can be reasonably estimated.

Answer 6

Record loss and liability.

If only a range is estimable, must recognize the liability for the lowest amount in the range.

Question 7

List a contingency’s probability of occurrence categories.

Answer 7

Probable
Reasonably possible
Remote

Question 8

What is the accounting and disclosure of an unasserted claim that is probable to occur?

Answer 8

If an unasserted claim is probable to occur, it must be disclosed and an estimated liability accrued.

Question 9

How do we account for the recovery of a purchase commitment loss?

Answer 9

A gain to the extent of the previously recognized loss

Question 10

If a firm has a purchase commitment that cannot be modified and the price declines, what journal entry should be booked?

Answer 10

DR: Loss on Purchase Commitment
CR: Liability on Purchase Commitment

Question 11

What is the required accounting for a potential loss on a purchase commitment when the commitment can be modified?

Answer 11

The loss is required to be footnoted as a contingent liability but is not accrued in the accounts because the loss is not probable, given that the contract can be revised.

Question 12

What is the required accounting for a potential loss on a purchase commitment when the commitment cannot be modified?

Answer 12

The loss must be accrued because the loss is probable and estimable.
Inventory is recorded at market, and a loss is recorded for the difference between contract and market.
If contract is not executed as of the balance sheet date, the loss is recognized and liability is established.