Information obtained prior to the issuance of the current period's financial statements of KG Company indicates that it is probable that, at the date of the financial statements, a liability will be incurred for obligations related to product warranties on products sold during the current period.During the past three years, product warranty costs have been approximately 1 1/2 percent of annual sales revenue.An estimated loss contingency should be:
A)Neither accrued nor disclosed in the financial statements.
B)Accrued in the accounts and reported in the financial statements.
C)Disclosed in the financial statements but not accrued.
D)Recognized as an appropriation of retained earnings.

Question

Quizplus · Accepted Answer

According to accounting principles, if it is probable that a liability has been incurred at the date of the financial statements and the amount can be reasonably estimated, the estimated loss contingency should be accrued in the accounts and reported in the financial statements. In this case, the history of warranty costs provides a basis for estimation.

Information Obtained Prior to the Issuance of the Current Period's