Loss contingencies
The following three situations are related to: 1). The possible accumulation and 2). The possible disclosure of a loss contingency:
Situation I. After the date of the financial statements, but before their publication, a company enters into a contract that is likely to cause considerable losses. The amount of these losses can be reasonably calculated.
Situation II. A company offers a one-year warranty on the product it makes. A history of warranty claims has been compiled and it is possible to determine the probable amount in relation to a period’s sales.
Situation III. One company has adopted a self-insurance policy for losses that could result from injuries that company vehicles cause to others. The premium for an annual policy taken out with an insurance company that covers the same risk would cost $ 3,000. During the financial statement period, there were no accidents involving company vehicles that caused personal injury.
Instructions:
State the accumulation or type of disclosure required (if any) and the reason or reasons why such disclosure is appropriate in each of the three situations above.
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