Simulation 13.1 Flashcards
On December 15, Year 8, Edge guaranteed a bank loan of $100,000 for its president’s personal use. The probability is remote that a loss will be incurred, and the fair value of the guarantee is $5,000.
Amount adjusted:
Additional disclosure required:
$5,000
Yes
On December 31, Year 8, Edge’s board of directors voted to discontinue the operations of its computer games division and sell all the assets of the division. The division was sold on February 15, Year 9. On December 31, Year 8, Edge estimated that losses from operations, net of tax, for the period January 1, Year 9 through February 15, Year 9, would be $400,000 and that the gain from the sale of the division’s assets, net of tax, would be $250,000. These estimates were materially correct.
Amount adjusted:
Additional disclosure required:
No entry required
No
On January 5, Year 9, a warehouse containing a substantial portion of Edge’s inventory was destroyed by fire. Edge expects to recover the entire loss, except for a $250,000 deductible, from insurance.
Amount adjusted:
Additional disclosure required:
No entry required
Yes
On January 24, Year 9, inventory purchased FOB shipping point from a foreign country was detained at that country’s border because of political unrest. The shipment is valued at $150,000. Edge’s attorneys have stated that it is probable that Edge will be able to obtain the shipment.
Amount adjusted:
Additional disclosure required:
No entry required
No
On January 30, Year 9, Edge issued $10 million bonds at a premium of $500,000.
Amount adjusted:
Additional disclosure required:
No entry required
Yes
On February 4, Year 8, the IRS assessed Edge an additional $400,000 for the Year 4 tax year. Edge’s tax attorneys and tax accountants have stated that it is likely that the IRS will agree to a $100,000 settlement.
Amount adjusted:
Additional disclosure required:
$100,000
Yes
On December 31, Year 3, Company A incurred a probable loss that can be reasonably estimated between $50,000 and $300,000. No amount within the range appears to be a better estimate than any other.
Effect:
Accrual of a liability of $50,000
The occurrence of a gain contingency is probable and its amount can be reasonably estimated as $300,000.
Effect:
Disclosure in the notes but not an accrual
On December 1, Year 3, one of Company A’s customers filed a lawsuit against the company. Company A’s management concludes that $300,000 is the reliable estimate of the costs that would result from the unfavorable ruling against the company. The company’s management and legal counsel agree that the likelihood of an unfavorable ruling is remote.
Effect:
Neither an accrual nor a disclosure
On December 1, Year 3, one of Company A’s employees sued the company for damages caused by unsafe working conditions. At the end of Year 3, management concludes that it is probable Company A will be held liable for damages, and that $300,000 would be a reasonable estimate of the amount to be paid to the employee to settle the lawsuit. Company A’s $1 million comprehensive liability insurance policy has a $50,000 deductible clause.
Effect:
Accrual of a liability of $50,000
On December 31, Year 3, Company A’s management and legal counsel agree that it is probable that the company will have to pay $300,000 to settle a lawsuit against the company.
Effect:
Accrual of a liability of $300,000
On December 31, Year 3, Company A’s management and legal counsel conclude that it is reasonably possible that Company A will be held liable in a lawsuit that was brought by the local government for environmental damages, and that the reasonable estimate of the amount the company will need to pay to settle the suit is between $50,000 and $300,000.
Effect:
Disclosure in the notes but not an accrual.
