The following items pertain to possible provisions: A company self-insures for floods. That is, it pays no insurance but is liable to replace assets lost through flood damage. No losses have been incurred this year, but there have been $195,000 of losses in most other years, and the company is concerned that there might well be $485,000 of losses next year, evening out the pattern. A company offers a three-year guarantee over parts and labour for products sold to ensure that parts work as expected. There were no payments this year, and only 5% of products sold this year are expected to need repairs in the next year. The cost of this work would be in the range of $125,000. A company has been sued by a customer for $1,130,000. The customer slipped on ice coming out of the store and claims the store did not put salt down or clear the stairs properly. The company’s lawyer has indicated that there is a 10% chance that the company will lose the lawsuit based on past history. The company, though, has decided to settle to avoid negative publicity. The costs of settling are estimated to range between $282,500 and $565,000. A company is required by legislation to undertake environmental remediation for a mining site that is currently active. The site will not be cleaned up until the mine closes, which is now scheduled for 2036. It is not certain how much the cleanup will cost at that time, or how long it will take. Required: In each of the above cases, indicate whether a liability is recorded or not. If it should be recorded then indicate the amount of the liability, if possible.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The following items pertain to possible provisions:

A company self-insures for floods. That is, it pays no insurance but is liable to replace assets lost through flood damage. No losses have been incurred this year, but there have been $195,000 of losses in most other years, and the company is concerned that there might well be $485,000 of losses next year, evening out the pattern.
A company offers a three-year guarantee over parts and labour for products sold to ensure that parts work as expected. There were no payments this year, and only 5% of products sold this year are expected to need repairs in the next year. The cost of this work would be in the range of $125,000.
A company has been sued by a customer for $1,130,000. The customer slipped on ice coming out of the store and claims the store did not put salt down or clear the stairs properly. The company’s lawyer has indicated that there is a 10% chance that the company will lose the lawsuit based on past history. The company, though, has decided to settle to avoid negative publicity. The costs of settling are estimated to range between $282,500 and $565,000.
A company is required by legislation to undertake environmental remediation for a mining site that is currently active. The site will not be cleaned up until the mine closes, which is now scheduled for 2036. It is not certain how much the cleanup will cost at that time, or how long it will take.

Required:
In each of the above cases, indicate whether a liability is recorded or not. If it should be recorded then indicate the amount of the liability, if possible.

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