FAR 5_02

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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.

True
When are warranty expenses accrued?

In the period the item was sold.

Author

BethM

338349

Card Set

FAR 5_02

Description

Becker Review 2018

Updated

2018-02-23T00:12:09Z

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