Contingencies

Question 1

Gain contingencies

Answer 1

-Do NOT record journal entry—per rule of conservatism
-Not recognized in FS BUT may need to disclose in footnotes

Question 2

When to disclose gain contingencies in footnotes

Answer 2

If probably is NOT remote

Question 3

Loss contingencies

Answer 3

-disclosure depends on likelihood of event

Question 4

Loss contingencies probability

Answer 4

-Probable-accrue, record JE, and disclose in footnotes
-reasonably possible-disclose in footnotes
-remote-no JE, no disclosure in footnotes

Question 5

The exception for remote loss contingency (DOG)

Answer 5

DOG Guarantee
D: debt of others I.e officer, related party
O: obligations of commercial banks under standby LC
G: guarantees of repurchase receivables that have been sold or assigned

Question 6

Conditions to accrue loss contingencies

Answer 6

BOTH has to be met:
-asset is impaired or liability incurred before issuance of FS
-amt of loss can be reasonably estimated
-accrue highest probability of occurrence UNLESS equal probability then accrue lowest amt and disclose in note the additional amt it could be
If cannot be reasonably estimated, disclose in notes.

Question 7

Premiums and other costs warranties

Answer 7

-are loss contingencies that are -accrued (are probable or reasonably estimated)
-Liability accrued in year of sale to match cost corresponding to revenue
-JE: debit estimated warranty expenses and credit warrant liability