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Definition of Contingency
An existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss when one or more future events occur or fail to occur
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Conditions Necessary For Accruing A Contingency As A Charge To Income
- 1. Info available prior to issuance of financial statements indicates that it is probable that an asset has been impaired or a liability incurred
- 2. Amount of the contingency can be reasonably estimable
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Action To Take When Reasonable Estimation A Loss Is A Range
- 1. When some amount in range is better than the rest, that amount is accrued
- 2. When no amount is better than any other estimate, the minimum amount in the range is accrued
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10 Examples of Loss Contingencies
- 1. Collectability of receivables
- 2. Obligations related to product warranties and product defects
- 3. Risk of loss or damage of enterprise property by fire, explosion, or other hazards
- 4. Threat of expropriation of assets
- 5. Pending or threatened litigation
- 6. Actual or possible claims and assessments
- 7. Risk of loss from catastrophes3
- 8. Guarantees of indebtedness of others
- 9. Obligations of commerical banks under "standby letters of credit"
- 10. Agreements to repurchase receivables that have been sold
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3 Ranges of Likelihood For Loss Contingency
- 1. Probable: future event likely to occur
- 2. Reasonably possible: chance of future event occurring is more than remote but less than likely
- 3. Remote: chance of future event occurring is slight
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3 Examples of Uncertainties That Are Not Contingencies
- 1. Depreciation - eventual expiration of the utility of the asset is not uncertain
- 2. Recurring repairs, maintenance, and overhauls, which interrelate with depreciation
- 3. Amounts owed for services received, such as advertising and utilities
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