Can someone please check my answers dealing with various contingencies.
-For each item, indicate how the situation should be accounted for and reported for the current year. Select the best answer from the accounting and reporting treatments listed below (A through D):
1. The company agreed to co-sign a loan for a supplier. The risk of loss is remote.
2. The company is a defendant in a lawsuit. The company's attorney indicates that a loss is probable and that the amount of the loss cannot be determined. A settlement is not expected for at least three years.
3. The company is a defendant in a lawsuit. Legal counsel indicates that there is a reasonable possibility of a loss and what the amount of loss is estimable. The case will be settled next year.
4. A loss contingency from a lawsuit is considered remote.
5. The company is a defendant in a lawsuit. The company's attorney indicates that a loss is probable and can be reasonably estimated. A settlement is not expected for two years.
6. The company is the plaintiff in a lawsuit. Legal counsel indicates that it is probable and estimable that the company will receive an award for damages. The case is expected to be settled in a year and a half.
A. Item is not a contingency.
B. Item should be accrued on the financial statements.
C. No accrual is necessary, but note disclosure is required.
D. Neither accrual nor disclosure is required. (Optional Disclosure)
My answers:
1. D
2. C.
3. B
4. D
5. B.
6. B.
To check your answers, let's go through each item and determine the correct accounting and reporting treatment:
1. The company agreed to co-sign a loan for a supplier. The risk of loss is remote.
The correct answer is D. Neither accrual nor disclosure is required. (Optional Disclosure). Since the risk of loss is remote, there is no need to make any accrual or disclose the contingency in the financial statements.
2. The company is a defendant in a lawsuit. The company's attorney indicates that a loss is probable and that the amount of the loss cannot be determined. A settlement is not expected for at least three years.
The correct answer is B. The item should be accrued on the financial statements. Since a loss is probable, it is necessary to accrue the estimated loss in the financial statements, even if the exact amount cannot be determined.
3. The company is a defendant in a lawsuit. Legal counsel indicates that there is a reasonable possibility of a loss and what the amount of loss is estimable. The case will be settled next year.
The correct answer is B. The item should be accrued on the financial statements. Since there is a reasonable possibility of a loss and the amount of loss is estimable, it is necessary to accrue the estimated loss in the current year financial statements.
4. A loss contingency from a lawsuit is considered remote.
The correct answer is D. Neither accrual nor disclosure is required. (Optional Disclosure). Since the loss contingency is considered remote, there is no need to make any accrual or disclose the contingency in the financial statements.
5. The company is a defendant in a lawsuit. The company's attorney indicates that a loss is probable and can be reasonably estimated. A settlement is not expected for two years.
The correct answer is B. The item should be accrued on the financial statements. Since a loss is probable and can be reasonably estimated, it is necessary to accrue the estimated loss in the financial statements.
6. The company is the plaintiff in a lawsuit. Legal counsel indicates that it is probable and estimable that the company will receive an award for damages. The case is expected to be settled in a year and a half.
The correct answer is B. The item should be accrued on the financial statements. Since it is probable and estimable that the company will receive an award for damages, it is necessary to accrue the estimated amount of the award in the financial statements.
Your answers are mostly correct:
1. D - Correct
2. C - Incorrect. The correct answer is B.
3. B - Correct
4. D - Correct
5. B - Correct
6. B - Correct
So, you have 5 out of 6 correct answers. Great job!