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Chapter 11: Q13RQ (page 604)

What is a contingent liability? Provide some examples of contingencies.

Short Answer

Expert verified

Contingent liabilities are potential but not actual and depend upon some future event.

Step by step solution

01

Contingent Liability

A contingent liability is an obligation that is based on a future event. This is a potential liability and not an actual liability. It is called contingent because it cannot be confirmed in present but can only be made sure after the happening of any future event.

02

Examples of contingencies

Some examples of the contingencies are as follow:

a) Claim over patent infringement

b) Any kind of lawsuit against the company

c) Warranty expense

d) Co-signing a notes payable

e) Giving a guarantee for third parties etc.

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Most popular questions from this chapter

Samuel Industries has three employees. Each employee earns two vacation days a month. Samuel pays each employee a weekly salary of $1,250 for a five-day workweek. Requirements

1. Determine the amount of vacation expense for one month.

2. Journalize the entry to accrue the vacation expense for the month.

When do businesses record warranty expenses, and why?

What is contingent liability? Provide some examples of contingencies.

Sell-Soft is the defendant in numerous lawsuits claiming unfair trade practices. SellSoft has strong incentives not to disclose these contingent liabilities. However, GAAP requires that companies report their contingent liabilities.

Requirements

  1. Why would a company prefer not to disclose its contingent liabilities?
  2. Describe how a bank could be harmed if a company seeking a loan did not disclose its contingent liabilities.
  3. What ethical tightrope must companies walk when they report contingent liabilities?

: On June 1, Hunting Man Magazine collected cash of $63,000 on future annual subscriptions starting on July 1. Requirements

1. Journalize the transaction to record the collection of cash on June 1.

2. Journalize the transaction required at December 31, the magazine’s year-end, assuming no revenue earned has been recorded. (Round adjustment to the nearest whole dollar.)
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