F4-M2 Contingencies and Commitments

Question 1

How should gain contingencies be disclosed?

Answer 1

Gain contingencies should be disclosed in the notes unless the likelihood of the gain being realized is remote. The full range of possible settlements should be disclosed

Question 2

How does GAAP classify the likelhood of contingent losses?

Answer 2

Probable: Likely to occur (expense when loss can be reasonably estimated)
Reasonably Possible: More than remote, but less than likely. (Disclose in notes with estimate of possible loss)
Remote: Slight chance of occurring. (No disclosure is necessary; however disclosure should happen for “guarantee-type” remote loss contingencies)

Question 3

What are premiums?

Answer 3

Offers to customers for the purpose of stimulating sales. Offered in return for coupons, box tops, labels, etc. Must be estimated accurately to reflect the current liability at the end of each period.

Question 4

What are warranties and how are they accounted for?

Answer 4

A seller’s promise to “correct” any product defects. Must create a liability account if the cost of the warranty can be reasonably estimated. Entire liability accrued in the year of the sale and, subsequently, the costs are matched with corresponding revenue.

Question 5

When a contingent liability is probable, estimable and the amounts with a range of values are equially likely, which amount should be used?

Answer 5

A contingent liability that is probable and estimable must be recognized.

If all amounts within a range of values are equally likely, then the lowest amount in the range is the measurement amount.