Podcast
Questions and Answers
Which of the following situations would be considered a contingency?
Which of the following situations would be considered a contingency?
- A company is sued for patent infringement, and the outcome of the lawsuit is uncertain. (correct)
- A company decides to raise prices on its products due to increased costs of materials.
- A company signs a contract for a new building, and construction is delayed due to unforeseen weather events.
- A company invests in a new product line, and the sales are lower than projected.
- A company makes a profit larger than expected due to a successful marketing campaign.
Which of the following situations would typically be accrued as a loss contingency?
Which of the following situations would typically be accrued as a loss contingency?
- A company is obligated to pay a customer a refund due to a defective product. (correct)
- A company's factory is damaged in a fire, and the insurance claim is pending.
- A company's investment in a new product line is expected to generate a lower return than initially projected.
- A company is threatened with a lawsuit by a competitor for unfair business practices.
Which of the following statements is TRUE regarding contingencies?
Which of the following statements is TRUE regarding contingencies?
- Contingencies should always be accrued, regardless of the likelihood of loss.
- Companies should disclose all contingencies in the financial statements, even those that are not accrued. (correct)
- Gain contingencies are typically recognized in the financial statements when they are probable and the amount can be reasonably estimated.
- All contingencies are loss contingencies because uncertainty always involves the possibility of losing something.
Which of the following is an example of a loss contingency that is NOT typically accrued?
Which of the following is an example of a loss contingency that is NOT typically accrued?
Which of the following situations would likely be accrued as a loss contingency?
Which of the following situations would likely be accrued as a loss contingency?
Which of the following is NOT a characteristic of a contingency?
Which of the following is NOT a characteristic of a contingency?
Under which of the following conditions would a company accrue a loss contingency related to a pending lawsuit?
Under which of the following conditions would a company accrue a loss contingency related to a pending lawsuit?
What is a key difference between a loss contingency and a gain contingency?
What is a key difference between a loss contingency and a gain contingency?
Under what condition must a company recognize a liability for a lawsuit?
Under what condition must a company recognize a liability for a lawsuit?
What is the key factor in determining whether to accrue a liability for a lawsuit?
What is the key factor in determining whether to accrue a liability for a lawsuit?
What type of warranty is an assurance-type warranty considered?
What type of warranty is an assurance-type warranty considered?
How should a company treat warranty costs associated with assurance-type warranties?
How should a company treat warranty costs associated with assurance-type warranties?
What is the estimated liability for Fluffy Cake Mix at December 31, 2025?
What is the estimated liability for Fluffy Cake Mix at December 31, 2025?
What should a company assess for unfiled suits to determine if a liability should be accrued?
What should a company assess for unfiled suits to determine if a liability should be accrued?
What is the cash outflow to record the purchase of mixing bowls for Fluffy Cake Mix in 2025?
What is the cash outflow to record the purchase of mixing bowls for Fluffy Cake Mix in 2025?
What is a potential risk of disclosing a probable negative outcome in financial statements?
What is a potential risk of disclosing a probable negative outcome in financial statements?
How much Premium Expense is recorded as a selling expense in the income statement for Fluffy Cake Mix in 2025?
How much Premium Expense is recorded as a selling expense in the income statement for Fluffy Cake Mix in 2025?
What type of warranty generally does not create a separate performance obligation?
What type of warranty generally does not create a separate performance obligation?
What is the primary reason gain contingencies are not recorded in financial statements?
What is the primary reason gain contingencies are not recorded in financial statements?
Which account is credited when the premium offers are estimated in the accounting records?
Which account is credited when the premium offers are estimated in the accounting records?
In the case of the employee lawsuit against Kroger, why is no liability recognized?
In the case of the employee lawsuit against Kroger, why is no liability recognized?
How many box tops did Fluffy Cake Mix customers redeem?
How many box tops did Fluffy Cake Mix customers redeem?
When should a company record a warranty liability?
When should a company record a warranty liability?
What component would increase the Premium Liability on Fluffy Cake Mix's balance sheet?
What component would increase the Premium Liability on Fluffy Cake Mix's balance sheet?
In the warranty example with Candy Machinery Company, what total expected warranty expense did they estimate?
In the warranty example with Candy Machinery Company, what total expected warranty expense did they estimate?
What characteristic defines service-type warranties?
What characteristic defines service-type warranties?
If High-Tech's settlement amount becomes known shortly, how should this be recorded?
If High-Tech's settlement amount becomes known shortly, how should this be recorded?
What was the total cash inflow from the sales of cake mix in 2025?
What was the total cash inflow from the sales of cake mix in 2025?
What common business practice is often associated with warranties?
What common business practice is often associated with warranties?
What should be disclosed in notes to the financial statements regarding gain contingencies?
What should be disclosed in notes to the financial statements regarding gain contingencies?
What impact do warranty costs typically have on companies?
What impact do warranty costs typically have on companies?
What happens if the legal counsel determines that a company is likely to lose a lawsuit?
What happens if the legal counsel determines that a company is likely to lose a lawsuit?
What is a critical aspect of managing warranty costs?
What is a critical aspect of managing warranty costs?
What determines whether Kroger should recognize a liability for the lawsuit as of December 31, 2025?
What determines whether Kroger should recognize a liability for the lawsuit as of December 31, 2025?
What condition must be met for a company to accrue a liability for a potential lawsuit?
What condition must be met for a company to accrue a liability for a potential lawsuit?
Under which condition should a company recognize warranty costs?
Under which condition should a company recognize warranty costs?
What must a company determine in order to record a contingent liability?
What must a company determine in order to record a contingent liability?
What is an assurance-type warranty?
What is an assurance-type warranty?
How is a contingent liability recorded in the accounts?
How is a contingent liability recorded in the accounts?
What should Candy Machinery Company record when it incurs actual warranty costs for the year 2025?
What should Candy Machinery Company record when it incurs actual warranty costs for the year 2025?
When must a company accrue an estimated warranty liability?
When must a company accrue an estimated warranty liability?
In the case of Macklin Manufacturing, what is the net loss recorded due to expropriation?
In the case of Macklin Manufacturing, what is the net loss recorded due to expropriation?
If Kroger determines it is probable they will lose the lawsuit, what must they do by December 31, 2025?
If Kroger determines it is probable they will lose the lawsuit, what must they do by December 31, 2025?
Which of the following factors do companies consider before recording a liability for litigation?
Which of the following factors do companies consider before recording a liability for litigation?
Which of the following is NOT an example of warranty costs?
Which of the following is NOT an example of warranty costs?
What happens if the estimate of a loss is within a range of values?
What happens if the estimate of a loss is within a range of values?
What type of circumstance generally does not require recording contingencies in financial statements?
What type of circumstance generally does not require recording contingencies in financial statements?
For how long does Candy Machinery's warranty on the vending machines last?
For how long does Candy Machinery's warranty on the vending machines last?
What is the appropriate entry to record the loss for a guarantee liability if Good Person Company estimates it at $1,800,000?
What is the appropriate entry to record the loss for a guarantee liability if Good Person Company estimates it at $1,800,000?
What is the total expected warranty expense for Candy Machinery Company based on the sale of 100 vending machines?
What is the total expected warranty expense for Candy Machinery Company based on the sale of 100 vending machines?
For service-type warranties, what is true compared to assurance-type warranties?
For service-type warranties, what is true compared to assurance-type warranties?
What could be a consequence of misinterpreting the term 'probable' in relation to contingent liabilities?
What could be a consequence of misinterpreting the term 'probable' in relation to contingent liabilities?
What happens if the probability of losing a lawsuit is assessed to be less than 50%?
What happens if the probability of losing a lawsuit is assessed to be less than 50%?
When a liability needs to be recorded due to a lawsuit, when must the cause occur?
When a liability needs to be recorded due to a lawsuit, when must the cause occur?
Which item is NOT considered a common loss contingency?
Which item is NOT considered a common loss contingency?
What must a company consider when estimating potential liabilities for pending litigation?
What must a company consider when estimating potential liabilities for pending litigation?
What must a company disclose in accordance with the full disclosure principle?
What must a company disclose in accordance with the full disclosure principle?
If an asset is expropriated and the company expects compensation, how should that be reflected in the financial statements?
If an asset is expropriated and the company expects compensation, how should that be reflected in the financial statements?
Which company factor is considered when assessing the probability of an unfavorable litigation outcome?
Which company factor is considered when assessing the probability of an unfavorable litigation outcome?
What should be done if there is uncertainty in estimating the loss amount?
What should be done if there is uncertainty in estimating the loss amount?
Which of the following statements accurately represents the accounting treatment for service-type warranties?
Which of the following statements accurately represents the accounting treatment for service-type warranties?
In the context of warranties, what is the primary purpose of recording a warranty liability?
In the context of warranties, what is the primary purpose of recording a warranty liability?
What is the key difference between assurance-type warranties and service-type warranties?
What is the key difference between assurance-type warranties and service-type warranties?
How is revenue recognized on service-type warranties?
How is revenue recognized on service-type warranties?
What journal entry is used to record the initial sale of a product with a service-type warranty?
What journal entry is used to record the initial sale of a product with a service-type warranty?
Which of the following costs associated with service-type warranties are typically expensed as incurred?
Which of the following costs associated with service-type warranties are typically expensed as incurred?
In the context of warranty accounting, what is the purpose of an adjusting entry at year-end?
In the context of warranty accounting, what is the purpose of an adjusting entry at year-end?
How does a company account for warranty costs incurred in the following year related to products sold in the current year?
How does a company account for warranty costs incurred in the following year related to products sold in the current year?
What is the typical accounting treatment for consideration payable to customers in a revenue arrangement?
What is the typical accounting treatment for consideration payable to customers in a revenue arrangement?
How does a company typically record premium offers to customers in return for box tops or other items?
How does a company typically record premium offers to customers in return for box tops or other items?
What is the main objective of offering premiums, coupons, and rebates to customers?
What is the main objective of offering premiums, coupons, and rebates to customers?
What is the difference between an assurance-type warranty and a service-type warranty?
What is the difference between an assurance-type warranty and a service-type warranty?
Which of the following entries records the payment of warranty costs related to sales made in the previous year?
Which of the following entries records the payment of warranty costs related to sales made in the previous year?
What is the purpose of recording warranty revenue?
What is the purpose of recording warranty revenue?
What is the correct accounting treatment for warranty expenses related to assurance-type warranties?
What is the correct accounting treatment for warranty expenses related to assurance-type warranties?
What is the main purpose of recording warranty liability?
What is the main purpose of recording warranty liability?
When should a company accrue a loss contingency related to a guarantee of indebtedness?
When should a company accrue a loss contingency related to a guarantee of indebtedness?
What is the accounting treatment for a loss contingency related to an expropriation of a plant asset?
What is the accounting treatment for a loss contingency related to an expropriation of a plant asset?
If a company has a contingent liability that is reasonably possible but not probable, how should it be disclosed in the financial statements?
If a company has a contingent liability that is reasonably possible but not probable, how should it be disclosed in the financial statements?
What is the accounting treatment for a contingent liability when the exact payee or payment date is unknown?
What is the accounting treatment for a contingent liability when the exact payee or payment date is unknown?
Which of the following is NOT a common loss contingency that companies may face?
Which of the following is NOT a common loss contingency that companies may face?
When considering a potential loss contingency related to litigation, which of the following factors is NOT a primary consideration?
When considering a potential loss contingency related to litigation, which of the following factors is NOT a primary consideration?
When determining the amount to accrue for a loss contingency, what should be used if the estimate involves a range of values?
When determining the amount to accrue for a loss contingency, what should be used if the estimate involves a range of values?
What is the primary concern expressed by accountants regarding the interpretation of "probable," "reasonably possible," and "remote" in relation to loss contingencies?
What is the primary concern expressed by accountants regarding the interpretation of "probable," "reasonably possible," and "remote" in relation to loss contingencies?
Which of the following best describes the full disclosure principle in relation to loss contingencies?
Which of the following best describes the full disclosure principle in relation to loss contingencies?
Which of the following is an example of a general risk contingency that is generally NOT reported in the financial statements?
Which of the following is an example of a general risk contingency that is generally NOT reported in the financial statements?
Which of the following is a true statement about the accounting treatment for loss contingencies related to guarantee and warranty costs?
Which of the following is a true statement about the accounting treatment for loss contingencies related to guarantee and warranty costs?
What is the primary reason why companies disclose risks in their financial statements?
What is the primary reason why companies disclose risks in their financial statements?
Which of the following best describes the accounting treatment for a loss contingency related to a claim or assessment?
Which of the following best describes the accounting treatment for a loss contingency related to a claim or assessment?
Which of the following is an example of a loss contingency that might be disclosed in the notes to the financial statements but not accrued as a liability?
Which of the following is an example of a loss contingency that might be disclosed in the notes to the financial statements but not accrued as a liability?
Which of the following is a true statement regarding the accounting treatment for a loss contingency related to consideration payable?
Which of the following is a true statement regarding the accounting treatment for a loss contingency related to consideration payable?
What is the primary difference between accruing a loss contingency and disclosing it in the notes to the financial statements?
What is the primary difference between accruing a loss contingency and disclosing it in the notes to the financial statements?
According to the revenue recognition principle, when should revenue be recorded?
According to the revenue recognition principle, when should revenue be recorded?
If a company offers a premium to customers and estimates that 60% of the premiums will be redeemed, how should the company account for the estimated redemptions?
If a company offers a premium to customers and estimates that 60% of the premiums will be redeemed, how should the company account for the estimated redemptions?
What is the primary reason companies do not record gain contingencies?
What is the primary reason companies do not record gain contingencies?
Which of the following would be considered a gain contingency?
Which of the following would be considered a gain contingency?
When should a company recognize a loss contingency?
When should a company recognize a loss contingency?
What is the appropriate accounting treatment for a premium offered to customers if the estimated redemption rate is 60% and the actual redemptions are 40%?
What is the appropriate accounting treatment for a premium offered to customers if the estimated redemption rate is 60% and the actual redemptions are 40%?
What is the primary purpose of the expense recognition principle?
What is the primary purpose of the expense recognition principle?
Which of the following would be considered a loss contingency that is likely to be accrued?
Which of the following would be considered a loss contingency that is likely to be accrued?
What is the primary difference between a gain contingency and a loss contingency?
What is the primary difference between a gain contingency and a loss contingency?
Why is it important for a company to estimate the redemption rate of premium offers?
Why is it important for a company to estimate the redemption rate of premium offers?
Which of the following is not considered a loss contingency that may be accrued?
Which of the following is not considered a loss contingency that may be accrued?
What is the appropriate accounting treatment for a gain contingency that is probable and reasonably estimable?
What is the appropriate accounting treatment for a gain contingency that is probable and reasonably estimable?
A company offers a premium to customers and estimates that 70% of the premiums will be redeemed. During the accounting period, customers redeemed 60% of the premiums. How should the company adjust its accounts at the end of the period?
A company offers a premium to customers and estimates that 70% of the premiums will be redeemed. During the accounting period, customers redeemed 60% of the premiums. How should the company adjust its accounts at the end of the period?
What is the warranty expense recognized in 2025 based on the information provided in the content?
What is the warranty expense recognized in 2025 based on the information provided in the content?
What is the total amount of warranty liability recognized in 2025?
What is the total amount of warranty liability recognized in 2025?
What is the total amount of warranty expense recognized in 2026 based on the information provided in the content?
What is the total amount of warranty expense recognized in 2026 based on the information provided in the content?
Why is the warranty expense recognized differently in 2025 compared to the warranty costs incurred in 2026?
Why is the warranty expense recognized differently in 2025 compared to the warranty costs incurred in 2026?
What is the warranty liability reported on the balance sheet at the end of 2026?
What is the warranty liability reported on the balance sheet at the end of 2026?
What is the total amount of service-type warranty revenue recognized in 2028?
What is the total amount of service-type warranty revenue recognized in 2028?
What is the amount of the assurance-type warranty liability that is recognized on the balance sheet at the end of 2025?
What is the amount of the assurance-type warranty liability that is recognized on the balance sheet at the end of 2025?
Why is the service-type warranty recognized differently from the assurance-type warranty?
Why is the service-type warranty recognized differently from the assurance-type warranty?
What is the journal entry required to record the sale of the car and related warranties on January 2, 2025?
What is the journal entry required to record the sale of the car and related warranties on January 2, 2025?
What is the journal entry required to record the warranty costs incurred for the assurance-type warranty in 2025?
What is the journal entry required to record the warranty costs incurred for the assurance-type warranty in 2025?
What is the total amount of warranty expense recognized for the car sold on January 2, 2025, by the end of 2025?
What is the total amount of warranty expense recognized for the car sold on January 2, 2025, by the end of 2025?
How is the revenue recognized for the service-type warranty in 2028?
How is the revenue recognized for the service-type warranty in 2028?
Which of the following costs related to the service-type warranty would be expensed as incurred?
Which of the following costs related to the service-type warranty would be expensed as incurred?
What is the purpose of offering premiums, coupons, and rebates to customers?
What is the purpose of offering premiums, coupons, and rebates to customers?
In what period is consideration payable recorded?
In what period is consideration payable recorded?
Flashcards
Contingency
Contingency
A situation with uncertain financial outcomes, like a lawsuit or warranty claim.
Loss Contingency
Loss Contingency
An existing condition that might lead to a financial loss for a company.
Gain Contingency
Gain Contingency
A potential for financial gain, like winning a lawsuit.
Accrued Liability
Accrued Liability
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Unaccrued Liability
Unaccrued Liability
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May Be Accrued
May Be Accrued
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Product Warranty or Premium
Product Warranty or Premium
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Risks of Product Loss or Damage
Risks of Product Loss or Damage
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Loss Contingencies
Loss Contingencies
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Guarantees of Indebtedness
Guarantees of Indebtedness
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Repurchase Agreements
Repurchase Agreements
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Contingency Accrual Criteria
Contingency Accrual Criteria
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Contingency Disclosure Requirements
Contingency Disclosure Requirements
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Accrual of Past Losses
Accrual of Past Losses
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Recording Loss Contingencies
Recording Loss Contingencies
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Liability Recording Requirements
Liability Recording Requirements
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Expropriation
Expropriation
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Expropriation Accounting
Expropriation Accounting
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Estimating Loss Ranges
Estimating Loss Ranges
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Litigation, Claims, and Assessments
Litigation, Claims, and Assessments
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Evaluating Litigation, Claims, and Assessments
Evaluating Litigation, Claims, and Assessments
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Guarantee and Warranty Costs
Guarantee and Warranty Costs
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Risk Disclosure
Risk Disclosure
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Full Disclosure Principle
Full Disclosure Principle
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Legal claims
Legal claims
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Probable loss
Probable loss
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Unprobable loss
Unprobable loss
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Accruing a liability
Accruing a liability
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Warranty
Warranty
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Assurance-type warranty
Assurance-type warranty
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Service-type warranty
Service-type warranty
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Warranty liability
Warranty liability
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Warranty costs
Warranty costs
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Warranty period
Warranty period
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Treble damages
Treble damages
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Federal Trade Commission (FTC)
Federal Trade Commission (FTC)
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Restraint of trade
Restraint of trade
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Warranty Expense
Warranty Expense
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Warranty Revenue
Warranty Revenue
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Unearned Warranty Revenue
Unearned Warranty Revenue
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Amortizing Warranty Revenue
Amortizing Warranty Revenue
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Consideration Payable
Consideration Payable
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Cash Rebate
Cash Rebate
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Premium Offer
Premium Offer
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Warranty Expense Recognition
Warranty Expense Recognition
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Warranty Liability Recognition
Warranty Liability Recognition
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Warranty Liability Adjustment
Warranty Liability Adjustment
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Warranty Accounting Equation
Warranty Accounting Equation
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Key Concepts of Warranty Accounting
Key Concepts of Warranty Accounting
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Recording Contingent Liabilities
Recording Contingent Liabilities
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Recording Loss Contingency
Recording Loss Contingency
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Premium Liability
Premium Liability
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Premium Expense
Premium Expense
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Estimated Redemptions
Estimated Redemptions
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Cost of Estimated Redemptions
Cost of Estimated Redemptions
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Recording Gain Contingencies
Recording Gain Contingencies
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Disclosure of Gain Contingencies
Disclosure of Gain Contingencies
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Gross Profit
Gross Profit
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Cost of Goods Sold
Cost of Goods Sold
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Sales Revenue
Sales Revenue
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Lawsuit
Lawsuit
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Accrued Loss Contingency
Accrued Loss Contingency
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Unaccrued Loss Contingency
Unaccrued Loss Contingency
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May Be Accrued Loss Contingency
May Be Accrued Loss Contingency
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Accrual of Loss Contingencies
Accrual of Loss Contingencies
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Contingency Disclosure
Contingency Disclosure
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What is a product Warranty?
What is a product Warranty?
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What is an assurance-type warranty?
What is an assurance-type warranty?
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What's a service-type warranty?
What's a service-type warranty?
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What are Warranty Expenses?
What are Warranty Expenses?
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Define Warranty Liability.
Define Warranty Liability.
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How are Warranty Expenses recognized?
How are Warranty Expenses recognized?
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What is a Warranty Liability Adjustment?
What is a Warranty Liability Adjustment?
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What does Amortizing Warranty Revenue mean?
What does Amortizing Warranty Revenue mean?
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What is Consideration Payable?
What is Consideration Payable?
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What is Restraint of Trade?
What is Restraint of Trade?
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What is Warranty Revenue?
What is Warranty Revenue?
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What is a Contingency?
What is a Contingency?
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What is a Loss Contingency?
What is a Loss Contingency?
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What is a Gain Contingency?
What is a Gain Contingency?
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Study Notes
Contingencies in Financial Reporting
- Contingencies are uncertain events with potential loss or gain. They're resolved when future events occur or fail to occur.
- Examples include lawsuits (e.g., Apple), product warranties (e.g., Ford), and guarantor obligations (e.g., PepsiCo).
Accrual of Loss Contingencies
-
Accrued Loss Contingencies: Recorded when both probable and reasonably estimable. They include:
- Product warranties and defects
- Premiums offered to customers
-
Not Accrued Loss Contingencies: Not recorded. They include:
- Property loss or damage from fire/explosion
- General business risks
-
May Be Accrued Contingencies: Accrued if both probable and reasonably estimable. They include:
- Threat of asset expropriation
- Pending or threatened litigation
- Claims and assessments
- Guarantees of others' debts
- Agreements to repurchase receivables
-
Recording Loss Contingencies: Debit loss account; credit liability account. Probability of liability is key, not precise details.
-
Expropriation Example (Macklin Manufacturing): Loss on asset recognized when probable compensation is known but less than the book value. Example debit Loss on Plant Assets $8,000,000; credit Plant Assets $8,000,000.
-
Litigation Example (Kroger): No liability recognized if a lawsuit has less than a 50% chance of unfavorable outcome.
Warranty Costs
- Assurance-Type Warranties: Included in sales price. Expensed when goods/service provided, record warranty liability.
- Service-Type Warranties: Separate performance obligation. Recorded in Unearned Warranty Revenue, recognized as revenue over time.
Consideration Payable (Premiums)
- Premiums as contingent payment create liabilities when a material obligation is present. Companies estimate number of outstanding claims. Premium expense debited; premium liability credited.
Gain Contingencies
- Gain contingencies are claims or rights to receive assets (or have liability reduced) and are not recorded unless highly probable for realization.
Disclosure of Contingencies
- General business risks (e.g., war, strike, recession) are not recorded.
- Gain contingencies are usually disclosed in notes if there is a high probability of realization.
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