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Chapter 24: 3CA_1 (page 1454)

Presented below are three independent situations.

Situation 1: A company offers a one-year warranty for the product that it manufactures. A history of warranty claims has been compiled, and the probable amounts of claims related to sales for a given period can be determined.

Instructions

Discuss the accrual or type of disclosure necessary (if any) and the reason(s) why such disclosure is appropriate for each of the three independent sets of facts above.

Short Answer

Expert verified

The contingency amount of damage is required to be shown in the financial statements.

Step by step solution

01

Meaning of Contingent Liabilities

A contingent liability is one that may or may not occur. This suggests that there is some doubt in documenting such liability in the financial records. This is due to the fact that a firm has no control over whether incidental responsibility occurs.

02

Discussing the appropriate disclosure that should be disclosed

When a corporation sells a product with a warranty, it is likely that expenses related to sales reported in the current period will be incurred in a future accounting period. As a result, there has been an obligation to fulfill the warranty at the same time that the revenue is recognized.

The frequency of warranty claims can be reasonably estimated and a probabilistic dollar estimate of responsibility based on past experience or technical study. The contingency for warranty damage contingency meets both the conditions for accrual and the amount of damage required to be shown in the financial statements.

In addition to recording the accrual, it may be a good idea to note the reasons used to make the estimate, especially if the loss is likely to be larger than the estimate.

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Most popular questions from this chapter

The following statement is an excerpt from the FASB pronouncement related to interim reporting. Interim financial information is essential to provide investors and others with timely information as to the progress of the enterprise. The usefulness of such information rests on the relationship that it has to the annual results of operations. Accordingly, the Board has concluded that each interim period should be viewed primarily as an integral part of an annual period. In general, the results for each interim period should be based on the accounting principles and practices used by an enterprise in the preparation of its latest annual financial statements unless a change in an accounting practice or policy has been adopted in the current year. The Board has concluded, however, that certain accounting principles and practices followed for annual reporting purposes may require modification at interim reporting dates so that the reported results for the interim period may better relate to the results of operations for the annual period.

Instructions

The following six independent cases present how accounting facts might be reported on an individual company鈥檚 interim financial reports. For each of these cases, state whether the method proposed to be used for interim reporting would be acceptable under generally accepted accounting principles applicable to interim financial data. Support each answer with a brief explanation.

c) Republic Company wrote inventory down to reflect lower-of-cost-or-market in the first quarter. At year-end, the market exceeds the original acquisition cost of this inventory. Consequently, management plans to write the inventory back up to its original cost as a year-end adjustment.

Subsequent events are reviewed through which date under IFRS?

a) Statement of financial position date.

b) Sixty days after the year-end date.

c) Date of independent auditor鈥檚 opinion.

d) Authorization date of the financial statements

Operating profits and losses for the seven industry segments of Foley Corporation are:

Penley $ 90 Cheng 20

Konami 40 Takuhi (34)

KSC (25) Molina 150

Red Moon 50

Based only on the operating profit (loss) test, which industry segments are reportable?

What are the major types of subsequent events? Indicate how each of the following 鈥渟ubsequent events鈥� would be reported.

a) Collection of a note written off in a prior period.

b) Issuance of a large preferred stock offering.

c) Acquisition of a company in a different industry.

e) Destruction of a major plant in a flood.

f) Death of the company鈥檚 chief executive officer (CEO).

g) Additional wage costs associated with settlement of a four-week strike.

h) Settlement of a federal income tax case at considerably more tax than anticipated at year-end.

Change in the product mix from consumer goods to industrial goods.

The following statement is an excerpt from the FASB pronouncement related to interim reporting. Interim financial information is essential to provide investors and others with timely information as to the progress of the enterprise. The usefulness of such information rests on the relationship that it has to the annual results of operations. Accordingly, the Board has concluded that each interim period should be viewed primarily as an integral part of an annual period. In general, the results for each interim period should be based on the accounting principles and practices used by an enterprise in the preparation of its latest annual financial statements unless a change in an accounting practice or policy has been adopted in the current year. The Board has concluded, however, that certain accounting principles and practices followed for annual reporting purposes may require modification at interim reporting dates so that the reported results for the interim period may better relate to the results of operations for the annual period.

Instructions

The following six independent cases present how accounting facts might be reported on an individual company鈥檚 interim financial reports. For each of these cases, state whether the method proposed to be used for interim reporting would be acceptable under generally accepted accounting principles applicable to interim financial data. Support each answer with a brief explanation.

b) Rockford Company is planning to report one-fourth of its pension expense each quarter.
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