Question

What are antingent habilities? "list four examples of these and discuss when they should be recorded.

Answer 1

A contingent liability is either

• a possible obligation (not present ) from past event that will be confirmed by some future event or
• a present obligation from past event, but either:

1. The outflow of economic benefits to satisfy this obliagation is not probable or
2. The amount of obligation cannot be reliably measured

Examples of contingent liability are:

1. You are facing lawsuit ,but your lawyers estimate the probability of losing the case at 30% ,in this case it's not probable that you will have to incur any expenditures to settle the claim.It's a contingent liability

2.Potential lawsuit arises when individual agree to give the guarantee on other person 's behalf and the person fail to pay the money.

3.Legal claims in which the court order to pay a sum or penalty for the case.

4.Product warranty - minimum guarantee for the certain period of time and when product fails to perform within the period which needs to be repaired or exchange.

Recognition of contingent liability

1.Probable - Record when there is probability that the event may occur and we can estimate the amount of loss

2.Reasonable Possible - Disclose the liability if it is reasonably possible but not probable.

3.Remote - No need of disclosure because chances are remote.