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AccountingIntermediate Accounting: Reporting And Analysis3rd Edition

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Chapter 9, Problem 2C
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Intermediate Accounting: Reporting...

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

Solutions

Chapter
Section
Problem 1GI
Problem 2GI
Problem 3GI
Problem 4GI
Problem 5GI
Problem 6GI
Problem 7GI
Problem 8GI
Problem 9GI
Problem 10GI
Problem 11GI
Problem 12GI
Problem 13GI
Problem 14GI
Problem 15GI
Problem 16GI
Problem 17GI
Problem 18GI
Problem 19GI
Problem 20GI
Problem 21GI
Problem 22GI
Problem 23GI
Problem 24GI
Problem 25GI
Problem 26GI
Problem 27GI
Problem 28GI
Problem 1MC
Problem 2MC
Problem 3MC
Problem 4MC
Problem 5MC
Problem 6MC
Problem 7MC
Problem 8MC
Problem 9MC
Problem 10MC
Problem 1RE
Problem 2RE
Problem 3RE
Problem 4RE
Problem 5RE
Problem 6RE
Problem 7RE
Problem 8RE
Problem 9RE
Problem 10RE
Problem 11RE
Problem 1E
Problem 2E
Problem 3E
Problem 4E
Problem 5E
Problem 6E
Problem 7E
Problem 8E
Problem 9E
Problem 10E
Problem 11E
Problem 12E
Problem 13E
Problem 14E
Problem 15E
Problem 16E
Problem 17E
Problem 18E
Problem 19E
Problem 20E
Problem 21E
Problem 22E
Problem 1P
Problem 2P
Problem 3P
Problem 4P
Problem 5P
Problem 6P
Problem 7P
Problem 8P
Problem 9P
Problem 10P
Problem 11P
Problem 12P
Problem 13P
Problem 14P
Problem 15P
Problem 16P
Problem 17P
Problem 18P
Problem 1C
Problem 2C
Problem 3C
Problem 4C
Problem 5C
Problem 6C
Problem 7C
Problem 8C
Problem 10C
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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Loss Contingencies

Part a. The two basic requirements for the accrual of a loss contingency are supported by several basic concepts of accounting. Three of these concepts are the period of time assumption, the recognition principle, and the qualitative characteristic of verifiability.

Required:

Discuss how the two basic requirements for the accrual of a loss contingency relate to the three concepts mentioned above.

Part b. The following three independent sets of facts relate to (1) the possible accrual or (2) the possible disclosure by other means of a loss contingency.

Situation I

A company offers a 1-year assurance-type warranty for the product that it manufactures. A history of warranty claims has been compiled and the probable amount of claims related to sales for a given period can be determined.

Situation II

Subsequent to the date of a set of financial statements, but prior to the issuance of the financial statements, a company enters into a contract that will probably result in a significant loss to the company. The amount of the loss can be reasonably estimated.

Situation III

A company has adopted a policy of recording self-insurance for any possible losses resulting from injury to others by the company’s vehicles. The premium for an insurance policy for the same risk from an independent insurance company would have an annual cost of $2,000. During the period covered by the financial statements, there were no accidents involving the company’s vehicles that resulted in injury to others.

Required:

Explain the accrual and/or type of disclosure necessary (if any) and the reason(s) why such disclosure is appropriate for each of the three independent situations described. Complete your response to each situation before proceeding to the next situation.

Part (a)

To determine

Discuss the manner in which the two basic requirements for the accrual of a loss contingency relate to the given concepts.

Explanation

The basic two requirements for the accrual of a loss contingency are the probability of loss and the reasonable estimation and these are the results of the interaction of various concepts of the accounting theory. The three concepts are as follows:

  • Period of time assumption
  • Recognition principle
  • Qualitative characteristic of verifiability

Period of time assumption:

According to the period of time assumption, the accrual of loss contingency must be satisfied before the issuance of the financial statements. There is a sign that it is probable where an asset has been decreased or a liability has been increased at the date of the financial statements. A basic objective in the recognition of the losses explains that it must be recognized during the particular time in which it is incurred. If the particular losses are not recognized, it will overstate the earnings in the starting period and understate the earnings in the future period. Thus, there should be a proper accounting for the loss contingency to be done within the particular period in which they incurred and this will allow the company to provide the financial statements to the users with appropriate information that are reliable with the period of time assumption...

Part (b)

To determine

Explain the accrual and type of disclosure that are necessary and the reason for the disclosure is appropriate for each situation.

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Ch-9 P-1GICh-9 P-2GICh-9 P-3GICh-9 P-4GICh-9 P-5GICh-9 P-6GICh-9 P-7GICh-9 P-8GICh-9 P-9GICh-9 P-10GI
Ch-9 P-11GICh-9 P-12GICh-9 P-13GICh-9 P-14GICh-9 P-15GICh-9 P-16GICh-9 P-17GICh-9 P-18GICh-9 P-19GICh-9 P-20GICh-9 P-21GICh-9 P-22GICh-9 P-23GICh-9 P-24GICh-9 P-25GICh-9 P-26GICh-9 P-27GICh-9 P-28GICh-9 P-1MCCh-9 P-2MCCh-9 P-3MCCh-9 P-4MCCh-9 P-5MCCh-9 P-6MCCh-9 P-7MCCh-9 P-8MCCh-9 P-9MCCh-9 P-10MCCh-9 P-1RECh-9 P-2RECh-9 P-3RECh-9 P-4RECh-9 P-5RECh-9 P-6RECh-9 P-7RECh-9 P-8RECh-9 P-9RECh-9 P-10RECh-9 P-11RECh-9 P-1ECh-9 P-2ECh-9 P-3ECh-9 P-4ECh-9 P-5ECh-9 P-6ECh-9 P-7ECh-9 P-8ECh-9 P-9ECh-9 P-10ECh-9 P-11ECh-9 P-12ECh-9 P-13ECh-9 P-14ECh-9 P-15ECh-9 P-16ECh-9 P-17ECh-9 P-18ECh-9 P-19ECh-9 P-20ECh-9 P-21ECh-9 P-22ECh-9 P-1PCh-9 P-2PCh-9 P-3PCh-9 P-4PCh-9 P-5PCh-9 P-6PCh-9 P-7PCh-9 P-8PCh-9 P-9PCh-9 P-10PCh-9 P-11PCh-9 P-12PCh-9 P-13PCh-9 P-14PCh-9 P-15PCh-9 P-16PCh-9 P-17PCh-9 P-18PCh-9 P-1CCh-9 P-2CCh-9 P-3CCh-9 P-4CCh-9 P-5CCh-9 P-6CCh-9 P-7CCh-9 P-8CCh-9 P-10C

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