Chapter 13: Current Liabilities and Contingencies Flashcards
Liabilities
Present obligation with probable future sacrifice, unavoidable (probable), transaction that causes obligation must have already happened
Current Liabilities
obligations whose liquidation is reasonably expected to require use of existing resources classified as current assets
Contingencies
existing condition involving uncertainty of future gains and losses, will ultimately be resolved when one or more events occur or fail to occur
Types of Contingencies
Gain Contingencies, Loss Contingencies
3 types of loss contingencies
Probable (more likely than not), Reasonably Possible (In between), Remote (low probability)
When are loss contingencies recognized?
When the event is probable and the amount of the liability can be reasonably estimated
Common Loss Contingencies
Litigation, claims, and assessments, Guarantee and warranty costs, Premiums and coupons, and environmental liabilities
Recording of litigation as loss contingency
In addition to probability and estimatability criteria, timing must be before the Balance Sheet date
Methods of recording Guarantee and Warranty Costs
Cash Basis, Accrual Basis
Cash Basis of Recording Guarantee and Warranty Costs
used in cases when not probable or estimatable, don’t recognize the liability (used in tax accounting)
Methods for Accrual Basis of Recording Guarantee and Warranty Costs
Expense Warranty Approach and Sales Warranty Approach
Expense Warranty Approach
Guarantee already attached to the product
Sales Warranty Approach
Warranty is separate sale and separate entity
When are premiums and coupons recognized?
Should be recognized as expenses in the period when the sale that benefits from the plan is made
Recording of unredeemed premiums and coupons
Estimated and recorded as liabilities
