Question

The following three independent sets of facts relate to (1) the possible accrual or (2) the possible disclosure by other means of a loss contingency.

Situation I

A company offers a 1-year assurance-type 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.

Situation II

Subsequent to the date of a set of financial statements, but prior to 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.

Situation III

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, there were no accidents involving the company's vehicles that resulted in injury to others.

Required:
Choose a Situation and explain the accrual and/or type of disclosure necessary (if any) and the reason(s) why such disclosure is appropriate.

Answer 1

Situation I

First situation is related to possible accrual because from the history they can determine the loss hence such situation is called possible accrual.

Situation II

Second Situation is also related to possible accrual and such should be disclose in financial statement because prior to issuance of financial statement it enters in a contract which significant effect the financial statement hence it should be disclosed in financial statements and amount of loss is reasonable estimated.

Situation III

Such annual cost of $ 2000 should be charge to Profil and Loss account as cost of doing business and the fact should be disclosed in the notes that there is no ccidents involve for that year.