F4 - M2 - Contingencies Flashcards
(16 cards)
What are the two outcomes of a contingency?
Positive outcome - You acquire an asset or it reduces a liability
Negative - Loss or impairment of an asset or incurrence of a liability
What are the ways GAAP likes to classify contingent losses and gains?
Probable: Likely to occur
Reasonably possible: More than remote, but less than likely
Remote: Slight chance of occuring.
Do you accrue gain contingencies?
No, but you may disclose in the notes. An example would be a positive litigation outcome where you would get money.
How do you know when to disclose a gain contingency in the footnotes?
You disclose the gain contingency that are probable or reasonably probable.
If the gain contingency is remote, then you do not disclose.
Would you disclose a loss contingency if the probability of it occurring is probable?
This means that it is likely to occur and can be reasonably estimated
You would accrue this and record a journal entry only if the amount can also be reasonably estimated. If you cannot reasonably estimate the loss, then you just disclose in the footnotes.
Would you disclose a loss contingency if the probability of it occurring is reasonably probable?
More than remote but less than likely
Disclose in the footnotes. Disclose the nature of the contingency and the estimate of the possible loss.
Would you disclose a loss contingency if the probability of it occurring is remote?
Slight chance of occurring
Do not record the entry or disclose in the footnotes. Unless it is the DOG acronym, then you would disclose.
If there is a range of probable losses, what amount would you accrue?
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.
You don’t need to do anything for remote losses, except for when the DOG acronym comes into play. When would you use that?
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.
If there is a loss contigency, what is the journal entry for that?
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.
What is potential loss contingencies? How are these treated?
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.
What are appropriated retained earnings? How is this accounted for?
This is the board sets aside a certain amount of RE to fund somehting in the future.
Debit - unappropriated RE and credit - appropratied RE
What are premiums and warranties? How are they accrued?
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.
What is the process to estimate premium redemption
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.
What is the process for recording a warranty?
In the same year as the sale, you want to debit estimated warranty expense, and credit warranty liability
Things to work on/remember?
Review the contingency rules. Not hard, just need to remember.
Review premium examples, the math is a little odd, but seems to be the same per question.
Warranties don’t seem too bad. Just remember that the liability is a percentage of sales, and that gets reduced by the actual costs made in the year.
