Contingencies and Other Losses and Liabilities Flashcards
An entity has decided to close one of its plants as part of a corporate restructuring. A number of employees will be fired, but they will also be given termination benefits. When should the entity recognize the liability for such benefits?
the termination plan has been approved
the number of employees to be fired is known
the benefit plans have been set
it is unlikely plans will be changed or withdrawn
An entity has decided to close one of its plants as part of a corporate restructuring. A number of employees will be fired, but they will also be given termination benefits. All of the qualifications for the liability have been reorganized, except that the employees must continue to work in order to qualify. When is the liability recognized?
Normally, the liability for termination benefits are recognized when all of the conditions are met. However, if employees must continue to work in order to gain these benefits, the liability is recognized over the time of required employment, rather than immediately.
What is a loss contingency?
A loss contingency is present when one event has already happened, and, if a second event happens, the entity will suffer a loss. A contingency is the time between one actual even and one possible event.
Which of the following are contingencies?
Lawsuits
Warranties or guarantees
coupons
all of these are contingencies
An entity has a contingent loss and is trying to determine the proper method of reporting. What are the possibilities?
if the second even is probable and the amount of loss can be reasonably estimated, the potential loss should be accrued/recorded immediately
if the second event is only reasonably possible or if the amount of loss is not subject to reasonable estimation, the loss should be disclosed in a footnote
if the second event is merely remote, no reporting is necessary
X guarantees a bank loan for its president. The entity feels that the chances of having to pay this loan for the president are remote.
What reporting is necessary?
disclosure is required here because of related party transaction but not because of the contingent liability by itself
X sells 50,000 boxes of a product in year 1, each with a coupon. For two coupons, a customer receives a $3 cash rebate. The entity expects 60% of the coupons will be redeemed. During year 1, 20,000 coupons are redeemed.
How much expense should be recognized in year 1?
What is the liability at the end of year 1?
coupons redeemed = 50,000 x .60 or 30,000
rebates to pay = 30,000/2 or 15,000
cost of rebates = 15,000 x $3 or $45,000
in year 1 20,000 coupons were redeemed
30,000 - 20,000 = 10,000 coupons left
10,000/2 = 5,000 x $3 = $15,000 liability
An entity has contingent loss that is viewed as probable. The loss is expected to be somewhere between 100,000 and 180,000.
What reporting is appropriate for the entity?
the loss is probable so it should be recognized
the entity should recognize the most likely amount if no amount is specified the lowest amount in the range with the remainder disclosed in the footnotes
In year 1, a contingent loss is considered to be probable, with a likely loss of $210,000. Late in year 2, the loss is finalized at $220,000. Comparative F/S are now being presented for years 1 and 2.
What amount of loss should be shown in each year?
In year 1, the loss is reported as $210,000
in year 2, another loss of $10,000 is recognized
If an entity has a contingent gain. What reporting is possible?
contingent gains are not accrued and are not recorded until they occur.
Y sells 20,000 toasters with a warranty. The entity believes it is probable that 10% of the toasters will break, with a cost to fix of $11 each.
If no toasters break in they year of sale, what adjusting entry is needed?
2,000 expected breakage (20,000 x .10)
2,000 x $11 = 22,000
warranty expense 22,000
warranty liability 22,000
A store sells a gift certificate for $100 to a customer.
What recognition is made initially for this transaction?
When is the revenue recognized?
at the time of sale the gift certificate is reported as unearned revenue which is reported as a liability on the B/S
revenue is recognized when the gift card is negotiated. If it expires the unearned revenue is reclassified into revenue
An entity is at the end of the current fiscal year and is trying to decide whether a liability must be recognized for compensated absences that will be taken in the future by its employees. Under what conditions should a future compensated absence be recognized currently as a liability?
the employee has performed the services
payment to the employee is probable
the amount of the payment is reasonably subject to estimation
the amounts earned will either vest or accumulate
What is a compensated absence?
a payment made to an employee even though the employee is not at work. vacation day, holiday or sick day
In deciding whether a compensated absence should be recorded as a liability, one factor to consider is whether the payments vest or accumulate.
What is meant by vest in this situation?
What is meant by accumulate in this situation?
Vest means that the employee can demand cash payments for the days of compensated absence, if the employee quits or is fired.
Accumulate means that the employee can carry unused days over from one year to the next without loss.
