Question

Ch.10

16) What are contingent liabilities? List three examples of contingent liabilities. When should contingent liabilities be recorded in the accounts?

Answer 1

Contingent liability is a possible obligation or a present obligation that arises due to past events but the recognition of such a liability is based upon the following factors:

a. Such an obligation will be settled which will involve outflow of resources; or,

b. Measurement of the obligation is can be done with sufficient reliability.

Three examples of contingent liabilities:

1. Pending investigation

2. Potential lawsuits

3. Product Warranty.

Recording contingent liabilities depends upon the following factors:

a. Reasonably Possible - Contingent liability should not be reported until and unless its existence is reasonably probable.

b. Probable - Contingent liability is to be recorded when the probability of the obligation arises due to past or current event and the loss can be estimated reasonably.