FAR-F5-M2-Contingencies and Commitments Flashcards
If the contingent liability is PROBABLE and CAN BE REASONABLY ESTIMATED, then how should it be treated?
If the contingent liability is PROBABLE and CAN BE REASONABLY ESTIMATED, then it should be accrued for on the balance sheet, aka recognized on the financial statements.
If the contingent liability is probable and can be reasonably estimated, what estimate should be used?
If a contingent liability is PROBABLE and CAN BE REASONABLY ESTIMATED, then the BEST estimate in a range is what should be accrued. If no estimate is better than any other, then the MINIMUM should be accrued AND a note including the range should be disclosed as well.
If a contingent liability is PROBABLE but CANNOT BE REASONABLY ESTIMATED, then how should it be treated?
If a contingent liability is PROBABLE but CANNOT BE REASONABLY ESTIMATED, then a description of the contingency and a range of possible loss MUST BE DISCLOSED.
If a range of possible loss cannot be estimated, then a statement saying such must be included in the notes.
If a contingent liability is REASONABLY POSSIBLE, then how should it be treated?
If a contingent liability is REASONABLY POSSIBLE, then do NOT ACCRUE. A description of the contingency and a range of possible loss MUST BE DISCLOSED.
If the contingent liability is REMOTE, what is the accounting treatment?
If the contingent liability is REMOTE, then it doesn’t need to be disclosed.
How and when are gain contingencies recognized?
Gain contingencies are NEVER recognized UNTIL REALIZED (the gain has actually been received), they will be mentioned only in a footnote, unless the gain contingency is remote, then no accrual or disclosure is necessary.
If only a range of possible settlements can be determined, then disclose the full range of possible settlements.
Are contingent liabilities that are sold with recourse allowed to not be disclosed in the financial statements?
No. Contingent liabilities that are sold with recourse are not discounted for footnote liability disclosure purposes because the seller is still liable for the full amount.
Is the following statement true or false? If a parent company acquires a subsidiary and the subsidiary has a contingent liability, the parent company will include the contingent liability on its books at the fair value of the contingent liability, regardless if the fair value is different then the carrying amount of the contingent liability.
True. If a parent company acquires a subsidiary and the subsidiary has a contingent liability, the parent company will include the contingent liability on its books at the fair value of the contingent liability, regardless if the fair value is different then the carrying amount of the contingent liability.
What are premium offers and what is their accounting treatment?
Premiums are offers to customers for the purpose of stimulating sales. They are offered in return for coupons, boxtops, labels, etc.
The cost of the premium is charged to expense during the period the related goods are sold.
What are warranties and what is their accounting treatment?
Warranties are a seller’s promise to correct any product defects. Sellers offering warranties must create a liability if the cost of the warranty can be reasonably estimated.
The entire liability for the warranty should be accrued for in the year of sale. The accrual should take place even if part of the warranty expenditure will be incurred in a later year.
