Question

Which one of the following would be considered a contingent liability?

A) A company estimates that it will probably have to pay $75,000 to the EPA for a chemical spill.

B) A company owes $35,000 on inventories purchased on credit.

C) A company has access to a line of credit with a bank in the amount of $120,000.

D) A company believes that it is reasonably possible it will lose a lawsuit and damages could be $100,000.

E) None of the above

explain logic

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. A contingent liability is recorded in the accounting records if the contingency is probable and the amount of the liability can be reasonably estimated.

Thus looking at the options, Option D) fulfills the criteria as it has future uncertain event that may result in payment of money on happening of it. Thus the following would be considered a contingent liability:

D) A company believes that it is reasonably possible it will lose a lawsuit and damages could be $100,000.