Question

Please answer the following question, required 150-200 words. Q: What are contingent liabilities? Provide an example

Answer 1

Contingent Liabilities are obligations or liabilities in the future which may or may not arise due to unsure events or situations. These liabilities are also recorded in the accounting books if the amount of the liability can be calculable.

If a person X took a loan from the Bank and Y is signed as a guarantee for that loan and the bank will give the funds on the basis of that guarantee, if the person X fails to repay the loan than the guarantee Y has to pay it, this is referred to as contingent liability. These are recorded when they are probable (when we can reasonably estimate the amount of the loss), reasonably possible and Remote (no need to record).

Examples

1. Potential Lawsuits

The potential lawsuit arises when an individual gives the guarantee on behalf of another person when the actual person fails to pay that the person who gave the guarantee must pay the money.

2. Product Warranty

A minimum guarantee for a certain period of time and when the product fails to perform within the warranty period than the product has to be replaced or repaired by the company.