53Far - Curr Liab - Contingent Liabilities

Front 1

What are contingent liabilities?

Back 1

Liabilities whose existence depends on a future event.

Front 2

What is the accounting for contingent liabilities dependent on?

Back 2

(1) The PROBABILITY of the occurrence of a future event and

(2) Whether the firm can estimate the amount.

Front 3

What is a Contingency?

Back 3

An EXISTING condition (at the balance sheet date) involving UNCERTAINTY as to a possible GAIN or LOSS that will be resolved when a FUTURE event occurs or fails to occur.

Front 4

What will the resolution of a contingency confirm?

Back 4

An increase in assets (or reduction in a liability), OR

The incurrence of a liability or an asset impairment.

Front 5

Does a contingency have to be a result of a past transaction or event like other liabilities?

Back 5

Yes. It's just that a contingent liability also has a future event that plays a role in recognizing the liability.

Front 6

In assessing the probability of occurrence of a future event of a contingent liability, what must be employed to classifty the probability?

Back 6

Professional Judgment

Front 7

What are the three categories of classifying the probability of a contingent liability?

Back 7

Probable
Reasonably Possible
Remote

Front 8

Describe the Probable classification for classifying the probability of a contingent liability.

Back 8

Based on professional, very high or near certainty.

Front 9

Describe the Reasonably Possible classification for classifying the probability of a contingent liability.

Back 9

Based on professional judgment, the probability of occurrence is neither very high nor remote. (middle)

Front 10

Describe the Remote classification for classifying the probability of a contingent liability.

Back 10

Based on professional judgment, the probability of occurrence is very low or remote.

Front 11

The accounting for contingencies is also dependent on reasonable estimates. Describe how to achieve a reasonable estimate.

Back 11

Based on professional judgment and experience, a determination is made about the POSSIBILITY of ESTIMATING the amount of the contingency.

Either the amount of resulting gain or loss is reasonably estimable, or it is not

Front 12

What are the two types of contingencies?

Back 12

Gain Contingency

Loss Contingency

Front 13

Name the four types of probabilities for loss contingencies?

Back 13

1. The loss contingency is probable and can be reasonably estimated at the balance sheet date.

2. The loss contingency is probable and cannot be reasonably estimated.

3. The loss contingency is reasonably possible.

4. The loss contingency is remote.

Front 14

What does SFAS 5 say about a contingent loss that is both probable and estimable?

Back 14

An estimated loss and estimated liability will be recognized

Front 15

What are the guiding theoretical considertions for contingent losses that are both probable and estimable?

Back 15

Conservatism and
Definition of a liability

Front 16

For contingent liability purposes, what is a loss?

Back 16

An asset decrease or liability increase

Front 17

What is meant by a loss contingency that is probable and cannot be reasonably estimated?

Back 17

SHOULD be disclosed in the footnotes

Front 18

What is meant by a loss contingency that is reasonably possible?

Back 18

Whether the loss can be reasonably estimated or not, the loss contingency IS disclosed in the footnotes

Front 19

What is meant by a loss contingency that is remote?

Back 19

Whether the loss can be reasonably estimated or not, the loss contingency CAN be disclosed in the footnotes.

Footnote disclosure is permitted but not required.

Front 20

What are the three types of Gain contingencies?

Back 20

1. Probable
2. Reasonably Possible
3. Remote

Front 21

What should be done if a gain contingency is probable?

Back 21

In this situation, whether the gain can be reasonably estimated or not, the gain contingency IS disclosed in the footnotes

Front 22

What should be done if a gain contingency is reasonably possible?

Back 22

In this situation, whether the gain can be reasonably estimated or not, the gain contingency IS disclosed in the footnotes

Front 23

What should be done if a gain contingency is remote?

Back 23

In this situation, whether the gain can be reasonably estimated or not, footnote disclosure of the gain contingency is not recommended.

Front 24

Firms may be able to estimate a possible range of amounts for the gain or loss, but be unable to assign any amount in the range a higher probability of occurring than any other amount. T or F

Back 24

True

Front 25

What is a loss in relation to contingent liabilities?

Back 25

An asset decrease or liability increase

Front 26

What is a gain in relation to contingent liabilities?

Back 26

An asset increase or liability decrease

Front 27

Conservatism plays an important role in recognizing contingent liabilities, but when only a range of possible values is known for a probable loss contingency, what is the exception made in recognizing in the accounts?

Back 27

When there's a range of values and no probability is given to one value over the other, the LOWEST rather than the highest amount is used for reporting purposes. -- However, the footnotes should disclose the entire range.

If a range of values were given but one value in the range has a higher probability assigned to it than any other, the value with the higher probability is used for reporting.

Front 28

What type of loss contingency is a warranty liability?

Back 28

Probable and Estimable

Front 29

For warranty liabilities, the firm ususally estimates the number of claims to be submitted by customers. What is the journal entry to record the estimate?

Back 29

Debit: Warranty Ex
Credit: Warranty Liab

Front 30

For warranty liabilities, when should an estimate of claims be recorded in the accounts?

Back 30

In the year of sales

Front 31

If a firm significantly overstates the actual claims cost from the previous year, what should be done in the current year?

Back 31

In an adjusting entry, a smaller percent of sales is used to estimate the current year's sales.

The opposite is true as well.

Front 32

Is there a retroactive adjustment for estimating warranty claims?

Back 32

No. The estimate is changed for the current and future periods to reflect the actual level of claims.

Front 33

Regarding a range of estimable loss contingincies with no value having a higher probability over the other, the lowest value should be used. Is this the least or most conservative option?

Back 33

Least

Front 34

What is the journal entry for a Contingent Litigation?

Back 34

Debit: Estimated Loss from Pending Lawsuit

Credit: Estimated Loss from Pending Lawsuit

Front 35

For contingent premium liabilities, how is the estimate for premium calculated?

Back 35

Sales/Contingency Factor x Probability % x Cost

i.e Contingency Factor would be: Must return 20 coupons to receive a free cup

Front 36

What two journal entries must be done in Year 1 of a premium offer?

Back 36

Record the Purchase of the premium item to be offered

Record the Estimate of the Premium to be redeemed

Front 37

What is the journal entry to record a purchase of an item for premiums to be offered?

Back 37

Debit: Premium Inv
Credit: Cash

Front 38

What is the journal entry to record the estimation of premiums to be redeemed?

Back 38

Debit: Est Prem Exp
Credit: Est Prem Liab

Front 39

What is the journal entry to record the actual redemption of a premium ( i.e. premium coupons)?

Back 39

Debit: Est Prem Liab
Credit: Prem Inv