Week 4, DQs - Week4,DQ1 What is a contingency? Why are...

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Week 4, DQ1 What is a contingency? Why are contingencies important to users of financial statements? What are the criteria for recording contingencies? Should companies record a liability for threatened litigation? Explain why or why not. A contingency is “An existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.” (Accounting for Contingencies, Statement of Financial Accounting Standards No. 5, Stamford, Conn.: FASB, 1975, par. 1). There are two types of contingencies: Contingent Liabilities and Contingent Assets. A contingent liability indicates that there is an existence of an obligation, where the amount due and/or the settlement date is uncertain. Unlike normal liabilities, contingent liabilities are dependent upon a future even. An example of a contingent liability is a product warranty. If a contingent liability is probable and can be reasonably estimated (using past experiences) then the liability can be accrued. On the other hand, if the amount of probable liability (example: threatened litigation) cannot be reasonably estimated, then a disclosure by means of a footnote is needed to inform the users of the financial statement about the likely outcome. Premiums and coupons are other examples of contingent liabilities. A contingent Asset is considered a probable asset that arises from past events and whose existence will be confirmed by the occurrence (or non-occurrence) of an uncertain future event. An example of this is a possible tax refund from a tax dispute or a pending court case with a reasonably high probability of a favorable outcome. Gain contingencies are not recorded, but disclosed if the probability of receipt is high. ***If loss or gain contingency is probable, then accrue and footnote, if reasonable possible – then  footnote, if there is a remote probability, then do not disclose.
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This note was uploaded on 01/12/2011 for the course ACCTING Acc423 taught by Professor Rob during the Spring '10 term at DeVry Long Beach.

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Week 4, DQs - Week4,DQ1 What is a contingency? Why are...

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