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Chapter 13: Question 20Q (page 691)

How are the terms 鈥減robable,鈥� 鈥渞easonably possible,鈥� and 鈥渞emote鈥� related to contingent liabilities?

Short Answer

Expert verified

Probable is the kind of contingencies that refers to the contingencies that are expected to occur and can be evaluated. They must be recorded in the financial statements.

Reasonably possible refer to the contingencies whose occurrence is unlikely but are still possible. They should be recorded in the footnote of the financial statements.

Remote refers to the contingencies that are unlikely to occur. They should be recorded as a financial footnote.

Step by step solution

01

Definition of Contingent Liabilities

Contingent liability is not an actual liability but an anticipated liability (probable liability which may or may not become payable). It depends upon the happening of certain events or the performance of certain acts. An element of uncertainty is always attached. A contingent liability, thus, may or may not become a sure liability.

02

Ways to suggest that terms “probable,” “reasonably possible,” and “remote” are related to contingent liabilities

The term 鈥減robable鈥� refers to the type of contingent liability that is recorded only when the loss is expected to occur, and one can make a fair assessment of the amount of the loss. Here, 鈥減robable鈥� means that a future event is expected to occur. Hence, it is mandatory to explain the liability in the footnotes that follow financial statements.

The term "reasonably possible" refers to the type of contingent liability in which an event is less likely to occur but is still possible. Here, contingent liabilities are recognized only when the liability is reasonably possible to evaluate and not probable. Therefore, the makers of the financial statements should show the existence of contingent liabilities in the notes following such statements.

The term "remote" refers to a type of contingent liability that is not disclosed if the probability of its occurrence is remote. It means that the contingencies are neither probable nor 鈥渞easonably possible.鈥� Thus, they are recorded as a financial footnote.

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Most popular questions from this chapter

Question: (Equity Investments) Castleman Holdings, Inc. had the following equity investment portfolio at

January 1, 2017.

Evers Company 1,000 shares @ \(15 each \)15,000

Rogers Company 900 shares @ \(20 each 18,000

Chance Company 500 shares @ \)9 each 4,500

Equity investments @ cost 37,500

Fair value adjustment (7,500)

Equity investments @ fair value \(30,000

During 2017, the following transactions took place.

1. On March 1, Rogers Company paid a \)2 per share dividend.

2. On April 30, Castleman Holdings, Inc. sold 300 shares of Chance Company for \(11 per share.

3. On May 15, Castleman Holdings, Inc. purchased 100 more shares of Evers Company stock at \)16 per share.

4. On December 31, 2017, the stocks had the following price per share values: Evers \(17, Rogers \)19, and Chance \(8.

During 2018, the following transactions took place.

5. On February 1, Castleman Holdings, Inc. sold the remaining Chance shares for \)8 per share.

6. On March 1, Rogers Company paid a \(2 per share dividend.

7. On December 21, Evers Company declared a cash dividend of \)3 per share to be paid in the next month.

8. On December 31, 2018, the stocks had the following price per share values: Evers \(19 and Rogers \)21.

Instructions

(a) Prepare journal entries for each of the above transactions.

(b) Prepare a partial balance sheet showing the investment-related amounts to be reported on December 31, 2017, and 2018.

Under what conditions should a short-term obligation be excluded from current liabilities?

Question: Explain how trading debt securities are accounted for and reported?

Question: On October 15, 2017, Oil Products Co. purchased 4,000 barrels of fuel oil with a cost of

\(240,000 (\)60 per barrel). Oil Products is holding this inventory in anticipation of the winter 2018 heating season. Oil Products

accounts for its inventory at the lower-of-FIFO-cost-or-net realizable value. To hedge against potential declines in the value of

the inventory, Oil Products also purchased a put option on the fuel oil. Oil Products paid an option premium of \(300 for the put

option, which gives Oil Products the option to sell 4,000 barrels of fuel oil at a strike price of \)60 per gallon. The option expires

on March 1, 2018. The following data are available with respect to the values of the fuel of inventory and the put option.

Date Market Price of Fuel Oil Time Value of Put Option

October 31, 2017 \(58 per gallon \)175

November 30, 2017 57 per gallon 105

December 31, 2017 54 per gallon 40

Instructions

(a) Prepare the journal entries of Oil Products for the following dates.

(1) October 15, 2017鈥擮il Products purchases fuel oil and the put option on fuel oil.

(2) October 31, 2017鈥擮il Products prepares financial statements.

(3) November 30, 2017鈥擮il Products prepares financial statements.

(4) December 31, 2017鈥擮il Products prepares financial statements.

(b) Indicate the amount(s) reported on the balance sheet and income statement related to the fuel oil inventory and the put

option on November 30, 2017.

(c) Indicate the amount(s) reported on the balance sheet and income statement related to the fuel oil and the put option on

December 31, 2017.

(Current Liability Entries and Adjustments) Described below are certain transactions of Edwardson Corporation. The company uses the periodic inventory system.

1. On February 2, the corporation purchased goods from Martin Company for \(70,000 subject to cash discount terms of 2/10, n/30. Purchases and accounts payable are recorded by the corporation at net amounts after cash discounts. The invoice was paid on February 26.

2. On April 1, the corporation bought a truck for \)50,000 from General Motors Company, paying \(4,000 in cash and signing a 1-year, 12% note for the balance of the purchase price.

3. On May 1, the corporation borrowed \)83,000 from Chicago National Bank by signing a \(92,000 zero-interest-bearing note due 1 year from May 1.

4. On August 1, the board of directors declared a \)300,000 cash dividend that was payable on September 10 to stockholders of record on August 31.

Instructions

(a) Make all the journal entries necessary to record the transactions above using appropriate dates.

(b) Edwardson Corporation鈥檚 year-end is December 31. Assuming that no adjusting entries relative to the transactions above have been recorded, prepare any adjusting journal entries concerning interest that are necessary to present fair financial statements at December 31. Assume straight-line amortization of discounts.
See all solutions

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