What is a gain contingency and how is it accounted?
Claims or rights to receive assets whose existence is uncertain, but may become valid upon the occurrence of future events.
Gain contingencies are not recognized
What is a loss contingency and when is it recognized?
The possible future loss whose existence is proven by subsequent events.
Recognized when
… it is probable (likely to occur)
… the amount can be reasonably estimated
… when a range of possible outcomes exists, the expected value is the midpoint of the range
How is a loss contingency accounted when it is “reasonably possible” or “remote”?
Reasonably Possible: disclosure, but not recognized
Remote: no disclosure, no recognition
Assume a lawsuit against the entity has ensued and it is probable that the entity will lose. The entity carries insurance to cover such events. How is this accounted?
The loss contingency is recorded at the estimated cost
The insurance coverage is considered a gain contingency and would not be recognized
The company expects an economic recession that will negatively impact earnings in the next two years. Can the company create a loss contingency for this event?
No
A premium is offered in exchange for the return of several box tops and a small fee. How is the premium accounted?
Estimate the Coupons Redeemed: total number of box tops x estimated redemption rate
Estimate the Premium Claims: coupons redeemed / coupons needed to receive the premium
Estimate the Liability: premium claims x cost of the premium item (this amount should be reduced by the fee paid by the customer)
True / False: Premium expense (for an item offered to customers in exchange for coupons) is a sales expense.