The following three cases relate to (1) the possible accrual or (2) the possible disclosure by other means of a loss contingency. Case 1 A company offers a one‐way 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. Case 2 Following the date of a set of financial statements, but before 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. Case 3 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, no accidents involving the company’s vehicles resulted in injury to others. Required: a) Discuss the accrual of a loss contingency and/or type of disclosure necessary (if any) b) Explain the reason(s) such a disclosure is appropriate for each of the three independent sets of facts given.
The following three cases relate to (1) the possible accrual or (2) the possible disclosure by
other means of a loss contingency.
Case 1
A company offers a one‐way 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.
Case 2
Following the date of a set of financial statements, but before 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.
Case 3
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, no accidents involving the company’s
vehicles resulted in injury to others.
Required:
a) Discuss the accrual of a loss contingency and/or type of disclosure necessary (if
any)
b) Explain the reason(s) such a disclosure is appropriate for each of the three
independent sets of facts given.
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