F4 - M2 - Contingencies Flashcards

1
Q

What are the two outcomes of a contingency?

A

Postive outcome - You acquire an asset or it reduces a liablity

Negative - Loss or impairment of an asset or incurrence of a liability

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Do you accrue gain contingencies?

A

No, but you may disclose in the notes. An example would be a positive litigation outcome where you would get money.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

How do you know when to disclose a gain contingency in the footnotes?

A

Is the probability remote?

If yes, do not disclose it

If no, disclose in the footnotes.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Would you disclose a loss contingency if the probability of it occurring is probable?

A

This means that it is likely to occur and can be reasonably estimated

You would accrue this and record a journal entry

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Would you disclose a loss contingency if the probability of it occurring is reasonably probable?

A

More than remote but less than likely

Disclose in the footnotes. Disclose the nature of the contingency and the estimate of the possible loss.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Would you disclose a loss contingency if the probability of it occurring is remote?

A

Slight chance of occurring

Do not record the entry or disclose in the footnotes. Unless it is the DOG acronym.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

If there is a range of probable losses, what amount would you accrue?

A

You accrue the loss with the highest probability of occurinng.

If they all have an equal chance of occuring, then you take the lowest amount to accrue.

For example, If the range of losses is 100,000 to 250,000 and all amounts have an equal probablility of occuring, you would accure the 100,000 amount.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

You don’t need to do anything for remote losses, except for when the DOG acronym comes into play. When would you use that?

A

D - Debt of others guaranteed (officers, related party, another company)

O - Obligations of commercial banks under standby letters of credit

G - Guarantees of repurchase receivables (or related property) that have been sold or assigned.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

If there is a loss contigency, what is the journal entry for that?

A

Debit: Lawsuit loss and Credit Lawsuit liability

If there is an insurance settlement or anything where you would get some of this money back, you would disclose in the footnotes as a gain contingency, but you would not book an entry for this until you get it.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is potential loss contingencies? How are these treated?

A

This is when you know someone is going to file a contingency, but they have not yet. Like you know a lawsuit is coming, they have just not done it yet.

This is treated just like a normal loss contingency.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are appropriated retained earnings? How is this accounted for?

A

This is the board sets aside a certain amount of RE to fund somehting in the future.

Debit - unappropriated RE and credit - appropratied RE

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are premiums and warranties? How are they accrued?

A

Premium - These are normally coupons, or something to help stimulate sales.

Warranties - This is to fix any product defects.

They are losses that are generally accrued by an entity. Has to be probable or reasonably estimated.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is the process to estimate premium redemption

A

You have to estimate how many premiums there are and how much you think will be collected in the period.

Total number of coupons issued * estimated redemption rate = total estimated coupon redemptions.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is the process for recording a warranty?

A

In the same year as the sale, you want to debit estimated warranty expense, and credit warranty liability

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q
A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly