The following three independent sets of facts relate to (1) the possible accrual

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 1: A company offers a one-way 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 2: Following the date of a set of financial statements, but before 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 3: 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 accrual cost of $2,000. During the period covered by the financial statements, no accidents involving the company's vehicles resulted in injury to others.

Discuss the accrual of a loss contingency and/or type of disclosure necessary (if any) and the reason(s) such a disclosure is appropriate for each of the three independent sets of facts above. Complete your response to each situation before proceeding to the next situation.

Explanation / Answer

Ans-

Situation 1:-

As needed per ASC 450-20, there is need to book an accrual for the expected warranty claims for purpose of matching the costs with the revenue earned:

Entry would be -

Dr Warranty expense

Cr Accrued liabilities

Situation 2-

In this case , the condition did not endure at the balance sheet date yet a probable loss is here and also can be estimated,

As per ASC 450-20, Ther is no need to book accrual however there needs to disclose the contract and the probable loss

Situation 3-

Any loss contingency would not be accrued because, during the period covered by the financial statements, there were no accidents involving the company’s vehicles that resulted in injury to others hence, there is no liability . Also, Company would not record expense since the company did not incur it.

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