3 guarantees to repurchase receivables or any related

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3. Guarantees to repurchase receivables or any related property that have been sold or assigned. 4. Disputes with the IRS over additional income taxes for prior years. 5. Pending lawsuits whose outcome is uncertain. G. What are gain contingencies? When are they recognized? When are they disclosed? These are potential decreases in liabilities or increases in assets that depend on future events. Conservatism dictates that most gain contingencies are not recognized (can you think of some exceptions?) Disclosure is made if the gain contingency is at least reasonably possible. List some examples of gain contingencies: Tax refunds, pending court cases when the probable outcome is favorable, tax loss carryforwards, receipt of money from gifts, donations, lotteries, etc.
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H. Summary recognition and disclosure table for contingencies: LOSS CONTINGENCIES Amount can be Amount cannot be Probability: reasonably estimated reasonably estimated Probable ACCRUE both a loss and a Do not accrue; report liability, and report them as a NOTE in the in the body of the financial financial statements. statements. Reasonably Do not accrue; report as a Do not accrue; report Possible NOTE in the financial as a NOTE in the statements. financial statements. Remote No accrual or note required; No accrual or note a note is permitted. required; a note is permitted. GAIN CONTINGENCIES Amount can be Amount cannot be Probability: reasonably estimated reasonably estimated Probable No accrual except in NOTE disclosure unusual circumstances. required; exercise care NOTE disclosure required. to avoid misleading inferences. Reasonably NOTE disclosure required; NOTE disclosure Possible exercise care to avoid required; exercise care misleading inferences. to avoid misleading inferences. Remote ******** Disclosure not recommended ********** I. Applications of Contingencies: Loss contingencies example 1 1. During 1998, Salt-n-Pepa Inc. became involved in a tax dispute with the IRS. Salt-n-Pepa's attorneys have indicated that they believe it is probable that Salt-
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n-Pepa will lose this dispute. They also believe that Salt-n-Pepa will have to pay the IRS between $900,000 and $1,400,000. After the 1998 financial statements were issued, the case was settled with the IRS for $1,200,000. What amount, if any, should be reported as a liability for this contingency as of December 31, 1998? Accrue $900,000 (the lower amount) because it is both probable and, since the estimates were given, reasonably estimable. The higher amount would also be disclosed in the footnotes. 2. On October 1, 1998, Alan Jackson Chemical was identified as a potentially responsible party by the Environmental Protection Agency. Jackson's management along with its counsel have concluded that it is probable that Jackson will be responsible for damages, and a reasonable estimate of these damages is $5,000,000. Jackson's insurance policy of $9,000,000 has a deductible clause of $500,000. how should Alan Jackson Chemical report this information in is financial statements at December 31, 1998?
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Christopher Reinemann
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