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Chpt_13_Solutions - 17(a A contingency is defined in FASB...

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17. (a) A contingency is defined in FASB Statement No. 5 as 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. (b)A contingent liability is a liability incurred as a result of a loss contingency. 18. A contingent liability should be recorded and a charge accrued to expense only if: (a) information available prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements, and (b)the amount of the loss can be reasonably estimated. EXERCISE 13-13 (20–30 minutes) 1. The FASB requires that, when some amount within the range of expected loss appears at the time to be a better estimate than any other amount within the range, that amount is accrued. When no amount within the range is a better estimate than any other amount, the dollar amount at the low end of the range is accrued and the dollar amount at the high end of the range is disclosed. In this case, therefore, Salt-n-Pepa Inc. would report a liability of $900,000 at December 31, 2007. (See FIN14 : Reasonable Estimation of the Amount of a Loss: An Interpretation of SFAS No. 5.) 2. The loss should be accrued for $5,000,000. The potential insurance recovery is a gain contingency—it is not recorded until received. 3. This is a gain contingency because the amount to be received will be in excess of the book value of the plant. Gain contingencies are not recorded and are disclosed only when the probabilities are high that a gain contingency will become reality.
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PROBLEM 13-6 (a) Cash ........................................................................
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