accounting ch. 13 part 2

what is a loss contingency?

an existing, uncertain situation involving potential loss depending on whether some future event occurs

what is an unasserted claim/assessment? what is the two step process used to determine the proper accounting treatment?

even if a claim has yet to be made when the financial statements are issued, a contingency may warrant accrual or disclosure. 1. is it probable that the suit, claim, or assessment will occur? (if yes, go to step 2) 2. if it is probable, then the likelihood of an unfavorable outcome and the feasibility of estimating a dollar amount should be considered in deciding whether and how to report the possible loss

why do companies offer extended warranties? when should a company recognize the revenue and expense related to extended warranty? what method is used to recognize the revenue?

offer extended warranties as another source of revenue for the company the revenue is recognized over the life of the extended warranty, the expense is recognized in the period the services are performed straight line method used to recognize revenue

why do companies offer manufactures warranties? when should a company recognize the expense related to the original warranty?

offer warranties to boost sales recognize the expense in the same accounting period the products are sold

what are the three categories of likelihood that the future events will confirm the incurrence of the liability?

probable: confirming event is likely to occur reasonably possible: the chance the confirming event will occur is more than remote but less than likely remote: the chance the confirming event will occur is slight

when are gain contingencies reported in the balance sheet?

they are not accrued