nov14 (1) - The contingency for warranties should be...

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Unformatted text preview: The contingency for warranties should be accrued because it is probable that expenditures will be made and the amount can be estimated from past experience. When customer claims are made and costs are incurred to satisfy those claims the liability is reduced. Warranty expense (2% $21,300,000) ......426,000 Estimated warranty liability ....426,000 Estimated warranty liability ($178,000 + 220,000) .....398,000 Cash, wages payable, parts and supplies, etc. .....398,000 The liability at December 31, 2011, would be reported as $278,000. A disclosure note also is appropriate.-Hanover grants a one-year warranty for each processing machine sold. Past experience indicates that the costs of satisfying warranties are approximately 2% of sales. -During 2011, sales of processing machines totaled $21,300,000. -2011 expenditures for warranty repair costs were $178,000 related to 2011 sales and $220,000 related to 2010 sales. -The January 1, 2011, balance of the warranty liability account was $250,000. Summary of IFRS Differences IAS No. 37 A difference in accounting relates to determining the existence of a loss contingency. We accrue a loss contingency under U.S. GAAP if its both probable and can be reasonably estimated. IFRS is similar, but the threshold is more likely than not. This is a lower threshold than probable. Also, under IFRS, present value of the estimated cash flows is reported when the effect of time value of money is material . According to U.S. GAAP, though, discounting of cash flows is allowed when the timing of cash flows is certain . Case 13-15: Current liabilities and contingencies; differences between U.S. GAAP and IFRS As a second-year financial analyst for A.J. Straub Investments, you are performing an initial analysis on Fizer Pharmaceuticals. A difficulty youve encountered in making comparisons with its chief rival is that Fizer uses U.S. GAAP and the competing company uses International Financial Reporting Standards. Required : If Fizer used IFRS as does its competitor, how would the following items described be reported differently? 1. Fizer has been designated as a potentially responsible party by the United States Environmental Protection Agency with respect to certain waste sites. These claims are in various stages of administrative or judicial proceedings and include demands for recovery of past governmental costs and for future investigations or remedial actions. Fizer accrues costs associated with environmental matters when they become probable and reasonably estimable. Counsel has advised that the likelihood of payments of about $70 million is slightly more than 50%. Accordingly, payment is judged reasonably possible and the contingency was disclosed in a footnote. 3. Fizer reported in its 2009 financial statements a long-term contingency at its face amount rather than its present value even though the difference was considered material. The reason the cash flows were not discounted is that their timing is uncertain. Subsequent Events...
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This note was uploaded on 11/20/2011 for the course FINANCE 640,722 taught by Professor Chabiyo,reeves during the Fall '11 term at Ohio State.

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nov14 (1) - The contingency for warranties should be...

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