Question

Concepts for Analysis 24-3 (Essay) 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.

Answer 1

Answer:1. Make provision for warranty claims.

2. Disclosure of contingent liability

3. No cost should be recorded.

Step-by-step explanation:

Warranty is an assurance made by firms to make good any agreed loss that is incurred by the customers in usage of goods and services whiting the period of the warranty. Since an estimation can be made based on firms history of sales a provision has to be made for possible warranty.

Since it's only probably that a loss will be Incurred by the firm by going into the contract and the financial statement has not been issue the firm should made a contingent liability disclosure in the report.

The self insurance is not a contract with a third party, in this vein no cost will be accrued until the loss is actually suffered.