Disclosures, Conditional and Contingent Liabilities Presented below are three independent situations. Situation 1 A company offers a

Question:

Disclosures, Conditional and Contingent Liabilities Presented below are three independent situations.

Situation 1

A company offers a one-year warranty for the product that it manufactures. A history of warranty claims has been compiled, and the probable amounts of claims related to sales for a given period can be determined.

Situation 2

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 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 annual cost of $4,000. During the period covered by the financial statements, there were no accidents involving the company’s vehicles that resulted in injury to others.

Discuss the accrual or type of disclosure necessary (if any) and the reason(s) why such disclosure is appropriate for each of the three independent sets of facts above.

(AICPA adapted)

Contingent liabilities
A contingent liability is an obligation of business related to an uncertain future event. The business must record it in its financial statements if the amount can be reliably estimated and it is probable that amount will be paid by business as a...