Contingent Liability Principles

Question 1

Define Contingent Liabilities?

Answer 1

Based on an existing condition but involves uncertainty about future events

Question 2

When do you accrue a contingent liability?

Answer 2

When it is probable and can be estimated (70% likely to occur)

Question 3

When do you have to disclose but not have to record a contingent liability?

Answer 3

If it is probable or possible but cannot be estimated

Question 4

If the contingent liability is deemed remote, how do you account for this?

Answer 4

Do not record anything or disclose anything

Question 5

What are examples of contingent liability?

Answer 5

• Lawsuits
• Warranties
• Rebates and premiums
• Coupon liabilities
• Guarantee of indebtedness

Question 6

What value of the contingent liability recognized?

Answer 6

If there a number given that is most likely, use that number.

If there is a range given, use the lowest amount in the range.

Question 7

When there is a gain contingencies, when is that recorded?

Answer 7

Gain contingencies are never recorded until the event actually happens.

Question 8

What is the journal entry if the lawsuit is more than the original estimate?

Answer 8

Estimated lawsuit liability DB
Loss DB
Cash CR

Question 9

What is the journal entry if the lawsuit is less than the original estimate?

Answer 9

Estimated lawsuit liability DB
Gain CR
Cash CR

Question 10

If you are filing a lawsuit again another company and you win the court case, but the defendant files an appeal, how is the income recorded?

Answer 10

You do not record a gain contingency. Because there was an appeal, no income is recorded.

Question 11

If you are filing a lawsuit against another company and it is probable and estimable that you will win. How is the presented in the financial statements?

Answer 11

There is no such thing as a gain contingency or recognition of a contingent asset.

You can mention it as a disclosure.