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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Contingencies and Subsequent Events The bookkeeper of a company you are auditing states, “Our balance sheet is dated December 31, the end of our accounting period. I don’t understand loss contingencies and subsequent events. Also, I see no reason for disclosing these items on the company’s balance sheet because they deal with events that might occur or have occurred after the balance sheet date.”

Required:

Write a short report to the bookkeeper that explains loss contingencies and subsequent events, as well as the importance of their disclosure on the company’s balance sheet.

To determine

Write a short report the bookkeeper explain the loss contingencies and subsequent events and their importance of disclosure on the balance of the Company.

Explanation

Loss contingencies:

Loss contingencies are certain situation that makes uncertainty as to possible losses incurred by the company if some future event occurs’ and they are disclosed in an accompanying note or directly in the financial statements. Some of the examples of loss contingencies include, product warranties, guarantees of another company’s’ debt, uncollectible accounts receivables. The two types of disclosures made relating to loss contingencies are as follows;

  • Loss contingencies are probably estimated if a liability is been incurred and the amount of loss can be reasonably projected.
  • If the above two conditions are not met, then the company must disclose the loss contingency in the notes to its financial statements.

Recognition and disclosure of loss contingencies assists the external users for predicting the company’s’ future use of financial resources.

Subsequent events:

A subsequent event occurs between the date of company’s’ balance sheet and the date at which the annual report is issued...

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