Question - Discuss accounting treatment for Contingencies as a whole. In general, describe the basic requirements under Financial Accounting Standards Board Codification ASC # 450; then use the Codification to support your accounting treatment for each of the events. If a note is required, briefly write the note disclosure that would be in the Notes to the Financial Statements
Chester Company has the following contingencies:
A treat of expropriation exists for one of its manufacturing plants located in a foreign country. Expropriation is deemed to be reasonably possible. Any compensation from the foreign government would be less than the carrying value amount of the plant.
Potential costs exist due to the discovery of a safety hazard related to one of its products. These costs are probable and can be reasonably estimated.
One of its warehouses located at a base of a mountain could no longer be insured against rock-slides losses. No rock slide losses have occurred.
a) How should Chester report the threat of expropriations of assets?
b) How should Chester report the potential costs due to the safety hazard?
c) How should Chester report the noninsurable rock slide risk?
d) One of Chester's largest business units deals exclusively in commodity metals, such as copper and gold. Recent global economic conditions have resulted in high volatility in both the price and supply of theses metals.
e) During routine internal control testing. Chester's internal audit function discovered that an executive assistant has been taking the loose change in petty cash.
CONTINGENCIES
Explain the accounting treatment for Contingencies. Explain your decisions for each of the following events for calendar year for Year 4.
a) Chester owns a small warehouse located on the banks of the river in which it stores inventory worth approximately $500,000. Chester is not a insured against flood losses. The river last overflowed its banks 20 years ago.
b) Chester offers an unconditional warranty on its toys. Based on past experience, Chester estimates its warranty expenses to be 1% of sales. Sales during Year 4 were $10 million.
c) On October 20, Year 4, a safety hazard related to one of Chester's toy products was discovered. It is probable that Chester will be liable for an amount in the range of $100,000 to $500,000. No amount in the range is a better estimate than any other.
d) On November 22, Year 4, Chester initialed a lawsuit seeking $250,000 in damages from patent infringement.
e) On December 17, Year 4, a former employee filed a lawsuit seeking $100,000 for unlawful dismissal. Chester's attorneys believe the suit is without. No court date has been set.