Question

Select the contingent liability from the list below.

Pending court case with a probable favorable outcome

Possible receipt from a litigation settlement

Obligations related to product warranties

Tax loss carryforwards

Answer 1

Contingent liabilities are liabilities that may be incurred by an entity depending on the outcome of an uncertain future event such as the outcome of a pending lawsuit. Contingent liability is recorded in the accounting records if the contingency is probable and the amount of the liability can be reasonably estimated.

Pending court case with a probable favourable outcome: Since the outcome of this case is favourable, it might be possible that the company is not required to pay anything. This its amount of liability cannot be determined.

Possible receipt from a litigation settlement: Receipt from a litigation settlement is a cash inflow for the company and not a liability.

Obligations related to product warranties: Warranties are cited as a contingent liability as it meets both of the required conditions (probable and the amount can be estimated).

Tax loss carry forwards: It is not a probable liability.

Answer: Obligations related to product warranties