Contingent Liability Essay Sample
A possible liability dependant upon some future event happening or non happening. For illustration. a company is named as a suspect in a $ 1 million case. Does that intend the company automatically has a liability of $ 1 million? What if the case has no virtue and can easy be defended? If it is likely that the company will lose and the sum can be estimated. a journal entry is prepared to debit Loss from Lawsuit and to recognition Lawsuit Payable. If it is possible but non likely that the company will lose. the journal entry is non made but alternatively there will be a footnote revelation. If the case is distant ( a nuisance suit without any virtue ) . there is no demand for a journal entry and no demand to unwrap the case. Accountants normally consider merchandise guarantees to be a contingent liability that is both likely and can be estimated and is hence recorded with a journal entry. What is the difference between a contingent liability and an estimated liability? A contingent liability is a possible liability ( and a possible loss ) .
It is dependent upon a future event happening or non happening. For case. if person files a case against Jay Corp. Jay Corp will hold a contingent liability. The case liability is dependent upon Jay Corp losing the case. ( Some cases are nuisance suits and will non do a loss and liability. ) When a contingent liability and loss are likely and the sum can be estimated. an estimated sum will be recorded as a liability. Some liabilities are non contingent liabilities but are estimated liabilities. For illustration. the electricity consumed. belongings revenue enhancements. worker compensation insurance premiums. fixs. etc. are perfectly owed because the services or goods were delivered. There is nil contingent about these. However. the precise sums may non be known at the clip that the fiscal statements are prepared. Therefore. these liabilities had to be recorded by utilizing estimated sums. I suspect that many of the accrual-type adjusting entries involve estimated liabilities. What is a contingent plus?
A contingent plus is a possible plus associated with a contingent addition. Unlike contingent liabilities and contingent losingss. contingent assets and contingent additions are non recorded in histories. even when they are likely and the sum can be estimated. An illustration of a contingent addition and contingent plus might be a case filed by Company A against Company B for violation of Company A’s patent. If it is likely that Company A will win the case and have an estimated sum of money. it has a contingent plus and a contingent addition. However. it will non describe the plus and addition until the case is settled. ( At most Company A will fix a really carefully worded revelation saying that it perchance could win the case. ) On the other manus. Company B will necessitate to do an entry in its histories if the loss eventuality is likely and the sum can be estimated. If one of those are losing. Company B will hold to unwrap the loss eventuality in the notes to its fiscal statements. What is a contingent liability?
A contingent liability is a possible liability. This means that the contingent liability might go an existent liability and a loss. or it might non. It depends on something in the hereafter. If your parent warrants your loan. your parent will hold a contingent liability. Your parent will hold an existent liability and a loss merely if you do non do the payments on the loan. On the other manus. if you make the loan payments. your parent will non hold a liability and loss. A $ 100. 000 case filed against your company is a contingent liability ( or loss eventuality ) . Your company will hold a liability and a loss merely if your company is found guilty. If your company proves that it is non guilty. the contingent liability will non go an existent liability and loss.
Another illustration of a contingent liability is a merchandise guarantee. If a company promised to replace a faulty unit at no cost to the client within one twelvemonth of purchase. the company will hold an existent liability merely if units are faulty. If the company is certain that no units will be returned as defective. the company will hold no liability and no guarantee disbursal. Accountants will enter a journal entry to describe a liability on the balance sheet and a loss or disbursal on the income statement merely if the loss eventuality is both likely and the sum can be estimated. If a contingent liability is possible ( but non likely ) . no journal entry is needed. However. the accountant must unwrap the contingent liability and loss in the notes to the fiscal statements. If a contingent liability is distant. so the comptroller will non describe the liability and loss and will non unwrap it. Where is a contingent liability recorded?
A contingent liability that is both likely and the sum can be estimated is recorded as 1 ) an disbursal or loss on the income statement. and 2 ) a liability on the balance sheet. As a consequence. a contingent liability is besides referred to as a loss eventuality. Guarantees are cited as a contingent liability that meets both of the needed conditions ( likely and the sum can be estimated ) . Guarantees will be recorded at the clip of a product’s sale with a debit to Warranty Expense and a recognition to Warranty Liability. A loss eventuality which is possible but non likely. or the sum can non be estimated. will non be recorded in the histories. Rather. it will be disclosed in the notes to the fiscal statements. A loss eventuality that is distant will non be recorded and will non hold to be disclosed in the notes to the fiscal statements. contingent addition
A possible addition that is non recognized by comptrollers in the fiscal statements until it really occurs. For illustration. Company P is actioning Company D over a patent violation. Company P has a contingent addition. Because of conservativism. comptrollers normally do non describe or unwrap contingent additions ( but will describe or unwrap contingent losingss ) .
