F4M2: Commitments and Contingency

Question 1

Gain contingency

Answer 1

No accrual or journal entry needed until gain is received

Gain is realized when received

Question 2

Loss contingency

Answer 2

Probable = Accrue
Reasonably possible = Disclose only
Remote = nothing
Remote exception (DOG guarantee) Disclose only

Question 3

Lawsuit Journal entry

Answer 3

dr. Lawsuit loss
cr. Lawsuit liability

Question 4

Warranty expense Journal entry

Answer 4

dr. warranty expense
cr. warranty liability

Question 5

Calculating coupon premiums

Answer 5

1. Start w/ coupons sold
2. Determine estimated cost % (usually given)
3. Determine the costs, then multiply remaining amount redeemed coupons

note: may need to divide amount based on facts
note: use net cost

Question 6

How are Favorable judgements and appeal decisions handled from an accounting perspective?

Answer 6

No accrual is booked on balance sheet

Question 7

How are awards in litigation, that have not been appealed, handled from an accounting perspective?

Answer 7

Record pretax gain (income) and receivable

Question 8

How to calculate warranty expense.

Answer 8

percentage of sales * sales = warranty expense

CPA examiners may ask to get the total estimated liability at the balance sheet date. Reduce actual warranty expense if provided.

Question 9

What is the rule of thumb for accruing an amount for a probable loss?

Answer 9

1. Use best estimate, if given or;
2. If no best estimate, use the lower of estimated range.