Information available prior to the issuance of the financial statements indicates that it is probable that, at the date of the financial statements, a liability has been incurred for obligations related to product warranties. The amount of the loss involved can be reasonably estimated. Based on the above facts, an estimated loss contingency should be
A) accrued.
B) disclosed but not accrued.
C) neither accrued nor disclosed.
D) classified as an appropriation of retained earnings.

Question

Quizplus · Accepted Answer

According to the information provided, it is probable that a liability has been incurred for product warranties and the amount of loss can be reasonably estimated. Therefore, an estimated loss contingency should be accrued. This means that a liability should be recorded on the company's books and financial statements to reflect the estimated loss. Accruing the contingency will result in a reduction of net income, as it represents an expense. Disclosure of the contingency is also required in the notes to the financial statements, but simply disclosing the contingency without accruing it is not sufficient. The contingency does not need to be classified as an appropriation of retained earnings, as it is a liability and not a distribution of earnings.

Information Available Prior to the Issuance of the Financial Statements