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Chapter 13: Q18Q (page 658)

Question: Under what conditions should a contingent liability be recorded?

Short Answer

Expert verified

Answer

Contingent liability is recorded when:

  1. It is likely to arise.
  2. The amount can be estimated.

Step by step solution

01

Definition of Contingent Liability

Contingent liability can be defined as the obligation that depends upon the happening of any uncertain event in the future period. Such liabilities are recorded to ensure that the financial statements are accurate.

02

Conditions under which contingent liability is recorded

The business entity will record the contingent liability when the liability is likely to arise, and the obligation amount for the respective liability can be reasonably estimated.

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Most popular questions from this chapter

Define (a) a contingency and (b) a contingent liability.

Leon Wight, a newly hired loan analyst, is examining the current liabilities of a corporate loan applicant. He observes that unearned revenues have declined in the current year compared to the prior year. Is this a positive indicator about the client’s liquidity? Explain.

Under what conditions should a provision be recorded?

What is an onerous contract? Give two examples of an onerous contract.

(Equity Method) On January 1, 2017, Pennington Corporation purchased 30% of the common shares of Edwards

Company for \(180,000. During the year, Edwards earned a net income of \)80,000 and paid dividends of $20,000.

Instructions

Prepare the entries for Pennington to record the purchase and any additional entries related to this investment in Edwards Company

in 2017.
See all solutions

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