Question

Analyze the following independent situations. Required: For each situation, state the likelihood of a future event and state how the contingency will be reported.

1. Company A estimates it will have to pay $85,000 in warranty repairs next year.
2. Company B is being sued by a customer. Company B's attorneys feel that this is a frivolous lawsuit and there is very little chance that the customer will win.
3. Company C co- signed a note payable for Company D. Company D is having serious financial problems and it is reasonably possible that Company C will have to pay the note.
4. Company E is being sued for a patent infringement. Company E's attorney feels that Company E will be found liable for damages caused by the patent infringement. However, the attorney states it is not possible to estimate the amount of the award.

Answer 1

Answer:

A contingent risk or contingent liability ought to be reported just in the event that it is probable to happen and the amount of liability can be sensibly estimated.In other material cases it ought to be revealed in notes to fiscal statement.

a)Company A estimates it will have to pay $85,000 in warranty repairs next year.

Company A estimaes it should pay $85,000 for warranty fixes in one year from now, so here it is probable that the fixes or repairs will happen and furthermore the amount of fixes could be estimated.So we should record warrant obligation and comparing loss for $85,000.

b) Company B is being sued by a customer. Company B's attorneys feel that this is a frivolous lawsuit and there is very little chance that the customer will win.

Company B is being sued by a client and its attorney's consider that there is an almost no possibility of client to win.So it is more uncertain that risk or liability will happen so we ought not record contingent obligation yet disclose this occasion in notes to fiscal statement as this is material to speculators or investors.

c) Company C co- signed a note payable for Company D. Company D is having serious financial problems and it is reasonably possible that Company C will have to pay the note.

Company C signed a note payable for organization D.Company D is having genuine money related issues and it is likely that sum won't be recovered however since sum not receivable isn't evaluated no liability ought to be recorded and just an disclosure ought to be made in notes to fiscal  statement about the fiscal wellbeing of organization D and actuality that sum is probable to be not received.

d)Company E is being sued for a patent infringement. Company E's attorney feels that Company E will be found liable for damages caused by the patent infringement. However, the attorney states it is not possible to estimate the amount of the award.

Company E is being sued for patent infringement and it is plausible that we will be sued, yet since the measure of award can't be reasonably assessed we ought not record any obligation and just a divulgence is required in the notes to budget summaries or fiscal statements about the claim and desire that we can lose the case.