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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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Various Contingency Issues

At December 31, 2019, Niki Company reviewed the following situations to consider their impact on its 2019 financial statements:

  1. 1. In December 2019, Niki became aware of a safety hazard related to one of its products and announced a product recall. Estimates of the probable costs resulting from the hazard include highest, most likely, and lowest amounts.
  2. 2. During 2019, Niki received a note for goods sold to a customer. The note was sold, with recourse, to a bank. The customer filed for bankruptcy in December 2019, before the note’s 2020 due date.
  3. 3. In 2015, Niki moved and assigned the remaining 10 years of its old lease to Pro Company, an unrelated third party. Pro agreed to make all payments due on the assigned lease, but Niki has prime responsibility for the lease to the lessor. At December 31, 2019, it is reasonably possible that Pro will be unable to make all payments due on the assigned lease.

Required:

For each of the preceding situations, state how Niki should report the impact, if any, on its 2019 financial statements, and explain why the reporting is appropriate.

To determine

State the manner in which Company N should report the impact on the 2019 financial statements and explain why the reporting is appropriate.

Explanation

Situation 1: In this Company N has conscious about the safety hazards and announced for a product recall. Company N should accrue a loss as the loss is probable and it can be estimated reasonably. The accrued liability must be equal to the most likely amount. The best estimate of the estimated loss is the most likely loss. The minimum amount in the range would be accrued if there is no amount in an estimated range than any other amount in the range. In addition to this, Company N should disclose this loss contingency in the note to the financial statement.

Situation 2: In this Company N should accrue for a loss and a liability for the note that is sold to the bank. The accrual amount should equal the due amount on the note and add the relevant costs and deduct the settlement that is expected from the bankruptcy...

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