C 9-2

Loss Contingencies

LO 9.5AICPA Adapted

1. Part b.

   The following situation is related 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.

   Required:

   Explain the accrual and/or type of disclosure necessary (if any) and the reason(s) why such disclosure is appropriate for each of the three independent situations described.