Exam 14: Operating Liabilities and Contingencies

A service-type warranty exists if the customer has the option to purchase the warranty separately.

Provisions for contingent losses are accrued because the likelihood of an unfavorable outcome is ________.

One of the three characteristics of liabilities is that they must arise from the firm's primary business obligations.

More contingencies are reported on the balance sheet under U.S.GAAP than under IFRS because of different definitions of "probable."

Under IFRS,asset retirement obligations are considered loss contingencies.

What is breakage and how does it relate to the accounting for sales of gift cards? Describe two methods for estimating the amount of breakage.

Define contingency.What exactly is the company uncertain about?

Accounting for an ARO requires estimating the fair value that the company would have to pay to retire the asset in today's market.

Some loss contingencies may be disclosed only in the footnotes even if the losses are deemed to be probable.

Cost of promotional premiums offered to customers are accrued as part of Cost of Goods Sold in the period in which related sales revenue is recognized.

Gift card breakage is never redeemed.

In February 2017,an explosion occurred at a Dinkol Company plant,causing damage to area properties.By April 15,2017,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 $4,000,000.Dinkol's comprehensive public liability policy contains a $400,000 deductible clause.For Dinkol's December 31,2016 financial statements,for which the auditor's fieldwork was completed in April 2015,how should this possible casualty loss be reported,if at all?

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

Bull's Eye Department Stores,Inc.records $150,000 in gift card sales and receives cash in year 1.Customers redeemed 30% of the gift cards to purchase merchandise in year 2.Which of the following would be included in the summary journal entry to reflect the year 2 redemption transactions?

Describe how to account for warranty costs if the warranty is determined to be a service-type warranty? An assurance-type warranty?

Big Dots provides a one-year warranty with all its products it sells.It estimates that it will sell 350,000 units of its product for the year ended December 31,2016,and that its total revenue for the product will be $105,000,000.It also estimates that 75% of the product will have no defects,5% will have major defects,and 20% will have minor defects.The cost of a minor defect is estimated to be $6 for each product repaired,and the cost for a major defect cost is about $21.The company also estimates that the minimum amount of warranty expense will be $1,500,000 and the maximum will be $6,000,000. a.Prepare the journal entry for 2016 under the warranty. 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 2016. d.Prepare the journal entry to record the redemption of 180,000 labels.

What are the three characteristics of a liability as defined in the conceptual framework?

Gabbit Publishers sold 6,000 annual subscriptions at $150 each on September 1.How much unearned revenue will be recognized for the year ending December 31?

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

A liability for a contingent loss will be accrued and reported on the balance sheet if the occurrence of the obligation is at least reasonably possible.