nov9class (1) - Contingent Losses and Liabilities...

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Contingent Losses and Liabilities
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Contingencies A loss contingency is an existing uncertain situation involving potential loss depending on whether some future event occurs.
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Two factors affect whether a loss contingency must be accrued and reported as a liability: 1. the likelihood that the confirming event will occur. 2. whether the loss amount can be reasonably estimated (or is known). Contingencies
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Contingencies – Likelihood of Occurrence P robable A confirming event is likely to occur. Reasonably Possible The chance the confirming event will occur is more than remote, but less than likely. Remote The chance the confirming event will occur is slight.
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A loss contingency is accrued only if a loss is probable and the amount can reasonably be estimated (or is known). Contingencies
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Examples of Contingencies Extended warranties Premiums/Rebates Litigation Claims Unasserted Claims & Assessments
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Product Warranties and Guarantees Product warranties inevitably entail costs. The amount of those costs can be reasonably estimated using commonly available estimation techniques. The estimate requires the following entry: GENERAL JOURNAL Page: 15 Date Description Debit Credit Warranty Expense $$$ Estimated Warranty Liability $$$
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Extended Warranties Extended warranties are sold separately from the product. So, revenue from separately priced extended warranty contracts is deferred as a liability at the time of sale and recognized on a straight- line basis over the contract period.
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Premiums Premiums included with the product are expensed in the period of sale. Premiums that are contingent on action by the customer require accounting similar to warranties .
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The majority of medium and large-size corporations annually report loss contingencies due to litigation. The most common disclosure is a note to the
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nov9class (1) - Contingent Losses and Liabilities...

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