Question

Drew is the accounting and finance manager for a manufacturer. At year-end, he must determine how to account for the company's contingencies. His manager, Mary, objects to Drew's proposal to recognize an expense and a liability for warranty service on units of a new product introduced in the fourth quarter. Mary comments, "There is no way we can estimate this warranty cost. We don't owe anyone anything until a product fails and is returned. Let's report an expense if and when we do any warranty work."

Prepare a memorandum for Drew to send to Mary defending his proposal.

Answer 1

Answer:

Accounting for contingencies

Date: 9th July 2018

To Ms.Mary, Manager, Finance

From: Drew, Accounting and Finance Manager

Re: Your comments on Contingency accounting

Regarding your coments on to perceive contingent liability of the warranty costs for our item beneath are the details of the prerequisite for contingency accounting.

US GAAP ASC 450-20-25 and according to IFRS IAS 37 deal with the accounting of contingencies and give the rules/guidelines

Contingencies are defined as the occasions that may occur in future timeframes. Contingencies may occur on the occurence of a future occasion/event or dependent on the non occurence of a future event.

Contigency might be a gain or a misfortune. Contingent gain would be expected increase in the estimation of any holding because of occurence or non occurence of any occasion.

Rules concerning discolsure of contingent gains are increasingly severe when contrasted with unexpected misfortunes. Unexpected or contingent gains are never recorded on the a/cs and most are not referenced in the notes. They are recorded just when there is most extreme chance of occurence and the worth can be assessed to the best degree of precision/accuracy.

Unexpected/contingent misfortune would be a likely decline in the estimation/value of the holding because of occurence or non occurence of any future anticipated occasion. Contingent liabilities are considered as misfortune contingencies.

The following are the various types of contingencies and their normal financial treatment:

In the event that the contingent liability is both likely and its worth can be assessed then it is recorded as

i. a cost or misfortune on the salary articulation, and

ii. a risk on the accounting report.

Warranties are the exampe of such sort of unforeseen/contingent liabilitiy, as there is a probability of its occurence and simultaneously the expense can be estmated dependent on the warranty terms. Furthermore, bookkeeping/accounting treatment for Warranties is that they will be recorded at the time of an item's sale with a debit to Warranty Expense and a credit for Warranty Liability.

A misfortune or loss contingency which is conceivable however there is no probability of its occurence or in the event that the precise amount of the liability can't be evaluated, at that point, it won't be recorded in the a/cs. Or maybe, it will be revealed in the notes to the fiscal reports.

A misfortune possibility which has remote chances of occurence won't be recorded and won't need to be disclosed in the notes to the fiscal reports.

Concerning over, the liability that may emerge because of the warranty should be represented according to the rules give.