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Accounting Contingencies

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Professor Diane Roberts
University of San Francisco



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1 - An accounting contingency involves a situation that has started but has not yet been resolved Which of the following is an accounting contingency?
A union has threatened to strike next quarter if its profit sharing demands are not met.
Election of an anti-US government in a foreign country is expected to make the business climate less favorable to US business operating in that country.
Lawsuit filed by a customer claiming injury during a slip and fall accident while touring the company’s plant.
All of the above.

2 - Loss contingencies are recorded if the loss is probable and there is a reasonable estimate. If there is a range of estimated amounts with no better or best estimate within that range, then what should be recorded?
Nothing as this is not considered a reasonable estimate.
The lowest amount in the range of estimated amounts.
The highest amount in the range of estimated amounts.
Either b or c depending upon management’s judgment.

3 - Loss contingencies involve either a potential liability or a potential impairment of an asset. If the loss contingency involves recording impairment of an asset the credit is to:
a contra asset.
the asset itself.
a liability account.
a contra equity.

4 - The company sued a news program for an unfavorable and inaccurate report it aired Legal consul indicates that the company will probably win and be awarded $3,000,000. What should be recorded in the current year?
A loss of $3,000,000.
A gain of $3,000,000.
Nothing as this is a loss contingency.
Nothing as this is a gain contingency.

5 - A product produces toxic waste during manufacture and a spill occurred EPA investigation found the company responsible for environmental remediation. Costs could be between $1,300,000 and $6,800,000 but $3,000,000 is the best possible estimate. What amount of loss should be recorded in the current year?
Zero as there is not enough information for an estimate to be made.
$1,300,000 as it is the lowest amount of the range of estimates.
$3,000,000 as it is the best possible estimate in the range.
$6,800,000 as it is the highest and most conservative estimate in the range.

6 - Gain contingencies are:
always recorded as an extraordinary item.
reported as a prior period adjustment when the contingency is resolve
are reported at the most conservative amount if probable.
not reported until resolved

7 - Which of the following loss contingencies would involve recording a debit to an expense?
Uncollectible accounts receivable.
warranty liability.
expropriation of assets.
both a and b.

8 - Land costing $1,000,000 was condemned by the City to build a fire station. Fair market value is $1,600,000 but the City will pay $1,100,000 as there are large pre-construction land preparation costs. What should the company record?
Gain of $100,000 for difference between cash received and cost.
Gain of $100,000 for difference between cash received and cost and $500,000 loss for difference between fair market value and cash receive
Loss of $500,000 for difference between fair market value and cash received
Loss of $600,000 for difference between fair market value and cost.

9 - A product was recalled for a safety hazard but some customers had already been hurt. Several lawsuits have been filed and legal counsel anticipates that damages will have to be paid in the range of $600,000 to $2,200,000 to compensate victims. How much should be recorded?
Nothing as this is not a reasonable estimate.
Nothing as there is no better or best estimate within the range.
$600,000 as it is the lower end of the range.
$2,200,000 as it the more conservative end of the range.

10 - Which of the following loss contingencies would involve recording a debit to a loss?
Explosion at a manufacturing plant that damaged surrounding properties.
Lawsuit over a product tampering situation.
Expropriation of assets by a foreign government.
All of the above.

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