Exam 13: Operating Liabilities and Contingencies

In February 2019, an explosion occurred at a Dinkol Company plant, causing damage to area properties. By April 15, 2019, no claims had yet been asserted against Dinkol. However, Dinkol's management and legal counsel have concluded that it is possible but not probable that Dinkol might be held responsible for negligence. Furthermore, they have determined that a reasonable estimate for damages might be as much as $7,000,000. Dinkol's comprehensive public liability policy contains a $800,000 deductible clause. For Dinkol's December 31, 2018 financial statements, for which the auditor's fieldwork was completed in April 2019, how should this possible casualty loss be reported, if at all?

When an Asset Retirement Obligation is first recognized, a liability account is credited.

ShoSho Manufacturing. is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals from its plant. ShoSho's lawyer states that it is probable that ShoSho will lose the suit and be found liable for a judgment costing ShoSho anywhere from $1,500,000 to $4,800,000. However, the lawyer states that the most probable cost is $4,100,000. As a result of the above facts, what accounting recognition, if any, should be accorded this situation under IFRS?

Lifeline Biofuels built an oil rig at a cost of $4.5 million. The company estimates the oil rig will have a useful life of 20 years (with no salvage value), after which Federal regulations require that the oil rig must be dismantled and the land area restored at an expected fair value of $1.3 million. The present value of these asset retirement costs is $400,000 based on the 6% after-tax discount rate. The company follows U.S. GAAP. a. Prepare the journal entry prepared at the completion of construction to value the oil rig. b. Prepare the journal entry to record the annual increase in the carrying value of the liability. c. At the end of 20 years, the company dismantles the oil rig and restores the land area at a cost of $1.5 million. Prepare the journal entry to record payment of the settlement costs in cash.

The obligation for compensated absences is based on services to be performed by the employee in the future.

Onopea Inc. considered two contingencies at the end of 2016: ** a probable loss in the range of $200,000 to $900,000 ** a reasonably possible loss of $150,000 Under IFRS, what is the balance for contingent liabilities at the end of 2016?

An assurance-type warranty is also referred to as an extended warranty.

National Refuse requires customers to pay $40 for each toter used for trash collection and charges this amount when delivered. When toters are returned, the amount is refunded to the customer. If a customer cancels the trash collection contract, but does not return the toter, the amount is forfeited by the customer. During the current year, 30 customers cancelled their contracts and failed to return their toter, while 105 toters are returned upon cancellation. Which of the following would be included in the journal entry to reflect the forfeiture?

What account is debited when the liability is initially capitalized for an asset retirement obligation to dismantle an ocean oil rig?

How does IFRS accounting for asset retirement obligations different from U.S. GAAP accounting?

Accretion expense required by U.S. GAAP is referred to as interest expense by IFRS.

Which of the following best describes the accounting for assurance-type warranty costs?

Contingencies should not be accrued, but should be disclosed if they are either (1) probable, but not estimable, or (2) reasonably possible.

Under what conditions is an employer required to accrue a liability for sick pay?

On October 1, 2018, Super Soup Corp. began offering customers a Super Soup Spoon in return for 20 soup can labels. This offer expires on March 31, 2019. The cost of each soup spoon is $1.50. Based on past experience, the company estimates that only 40% of the labels will be redeemed. During 2018, the company purchased 13,000 soup spoons and sold 600,000 cans of soup at $1.20 per can (the company uses the periodic inventory method). From these sales, 180,000 labels were returned for redemption in 2018. a. Prepare the journal entry to record the purchase of 12,000 soup spoons. b. Prepare the journal entry to record the sale of 600,000 cans of soup. c. Prepare the journal entry to estimate the premium expense for 2018. d. Prepare the journal entry to record the redemption of 180,000 labels.

E-Z Electronics is running a video game promotion. For every 15 video games purchased, the customer receives a coupon upon checkout to receive a free game. The coupons expire in one year. E-Z estimates that about half of its video game customers will qualify to receive a coupon. In the past, the store has recognized a gross profit margin of 20% of the selling price on video games. What would the expected redemption percentage be to calculate the premium expense and related contingent liability? (Remember to use the gross profit margin to arrive at cost.)

Onopea Inc. considered two contingencies at the end of 2016: ** a probable loss in the range of $200,000 to $800,000 ** a reasonably possible loss of $150,000 Under U.S. GAAP, what is the balance for contingent liabilities at the end of 2016?

A company gives each of its 50 employees (assume they were all employed continuously through 2018 and 2019) 12 days of vacation a year if they are employed at the end of the year. The vacation accumulates and may be taken starting January 1 of the next year. The employees work 8 hours per day. In 2018, they made $17.50 per hour and in 2019 they made $20 per hour. During 2019, they took an average of 9 days of vacation each. The company's policy is to record the liability existing at the end of each year at the wage rate for that year. Under U.S. GAAP, what amount of vacation liability would be reflected on the 2018 and 2019 balance sheets, respectively?

Which of the following is not a way IFRS differs from U.S. GAAP for asset retirement obligations?

A company has a probable loss that can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. Under U.S. GAAP, what amount of loss contingency should be accrued?