F4 M2 Flashcards
Commitments and contingencies
contingency
condition, situation, or circumstances involving uncertainty as to gain contingency and loss contingency as to when the event will occur or not
examples of gain contingencies
1) expected favorable settlement from a pending court case
2) possible refunds regarding tax disputes
what does probable mean?
likely to occur
when are gain contingencies recognized?
-when they have been realized
-if not realized, the gain contingency is disclosed in notes to the F/S
what does reasonably possible mean?
more than remote, but less likely
what does remote mean?
slight chance of occurring
how should a loss that is probable and reasonably estimated be treated prior to issuance of F/S?
it should be accrued and disclosed in the notes
if you have a range of possibilities and there is one that is the better estimate, what should you do?
GAAP requires to use the best estimate of loss to be accrued
if you have a range of possibilities and there is not a better estimate of the two, what do you do?
Accrue for the minimum amount in the range and a note disclosing the loss
what if the loss is reasonably possible?
-only make a note disclosure, including:
1) the nature of the contingency AND 2) estimate of possible loss or range of loss, or statement that estimate cannot be made
what is the loss is remote?
-no disclosure necessary
-however, disclosure should be made for guarantee type losses like:
1) debts of others guaranteed
2) obligations of commercial banks under standby letters of credit
3) guarantees to repurchase receivables (or related party) that have been sold or assigned
what if you have a loss that is probably but cannot be reasonably estimated?
disclose the range of possible amounts
appropriation of retained earnings
1) shown in stockholder’s equity section and clearly identified
2) costs or losses NOT charged to appropriation of RE nor appropriation transferred to income
3) any appropriation should be restored to RE as soon as purpose no longer needed
premiums
-offers to customers to stimulate sales
-offered in return for coupons, box tops etc.
-cost of premium charged to sales in period benefit is incurred
coupons to be redeemed calc
total number of coupons issued * estimated redemption rate = total estimated coupons to be redeemed
(coupons redeemed)
= coupons to be redeemed
