Current Liabilities, Provisions, And Contingencies

a contingent liability that is probable and the dollar amount can be estimated should be

Warranty revenue. Espinosa Co. has a loss contingency to accrue. The loss amount can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The amount of loss accrual should be a. Zero.

a contingent liability that is probable and the dollar amount can be estimated should be

And you can estimate the amount under those circumstances you would record an expense and a liability. And this will be a contingent liability. So once again a lawsuit. If you are being sued and companies sue each other all the time for example. 78. All of the following are true regarding the presentation of current liabilities in the statement of financial position except a.

Our example only covered the warranty expenses anticipated from the 2019 sales. Since the company has a three-year warranty, and it estimated repair costs of $5,000 for the goals sold in 2019, there is still a balance of $2,200 left from the original $5,000.

Incorporating Contingent Liabilities In A Financial Model

Before examining the specifics of the contingent liabilities, auditors will determine a dollar amount they consider significant based on the company’s financial situation. If the contingent liability is under the immateriality limit, no special disclosure or treatment is necessary. For example, consider a company with $8 million in revenue is facing a lawsuit with potential damages of around $800. Even if it’s probable the company will have to pay, the auditor may not consider the amount to be material. This financial recognition and disclosure are recognized in the current financial statements. The income statement and balance sheet are typically impacted by contingent liabilities. Per GAAP, contingent liabilities can be broken down into three categories based on the likelihood of occurrence.

a contingent liability that is probable and the dollar amount can be estimated should be

Expensed when warranty claims are certain. Expensed when incurred. A contingency can be accrued when a. It is certain that funds are available to settle the disputed amount.

Buying Merchandise On Account In The Ordinary Course Of Business Creates:

The sum of cash and short-term investments divided by short-term debt. Current assets divided by current liabilities. Current assets divided by short-term debt. The sum of cash, short-term investments and net receivables divided by current liabilities. 75. Which of the following is the proper way to report a contingent asset, receipt of which is virtually certain?

Which of the following is not considered a part of the definition of a liability? Armadillo Industries has been notified by the local zoning commission that it must remediate abandoned property on which chemicals had been stored in the past. Armadillo has hired a consulting firm to estimate the cost of remediation, which has been documented at $10 million. Since the amount of the loss has been reasonably estimated and it is probable that the loss will occur, the company can record the $10 million as a contingent loss. If the zoning commission had not indicated the company’s liability, it may have been more appropriate to only mention the loss in the disclosures accompanying the financial statements. The asset and gain are contingent because they are dependent upon some future event occurring or not occurring.

a contingent liability that is probable and the dollar amount can be estimated should be

General business risks include the risk of war, storms, and the like that are presumed to be an unfortunate part of life for which no specific accounting can be made in advance. A contingent asset is a potential economic benefit that is dependent on future events out of a company’s control. An estimated liability is certain to occur; so, an amount is always entered into the accounts even if the precise amount is not known at the time of data entry. We certainly recognize the vitality and wealth that entrepreneurial ventures, particularly those in the high-tech sector, bring to the U.S. economy. A strong case can be made for creating public policies that actively assist these companies in their early stages, or even in their more established stages.


Which gives rise to the requirement to accrue a liability for the cost of compensated absences? Payment a contingent liability that is probable and the dollar amount can be estimated should be is probable. Employee rights vest or accumulate. Amount can be reasonably estimated. All of the above.

  • Employees will tend to exercise early if most of their wealth is bound up in the company, they need to diversify, and they have no other way to reduce their risk exposure to the company’s stock price.
  • And employer’s portion of FICA taxes, and unemployment taxes.
  • 13.
  • Current asset turnover ratio.
  • The discount represents the credit quality of the borrower.

Sales taxes payable. Short-term obligations assets = liabilities + equity expected to be refinanced.

Income statement as an expense. Statement of financial position as an asset.

What Is An Example Of A Contingency?

Unlike probable contingent liabilities, possible contingent liabilities aren’t estimated and reported on the balance sheet or income statement. Instead, the company includes a disclosure note to the financial statements describing the liability and what could trigger it. A possible contingent liability would only show up on the balance sheet and income statement normal balance if it is realized. Finally, there is the issue of whether to allow companies to revise the income number they’ve reported after the grants have been issued. Some commentators argue that any recorded stock option compensation expense should be reversed if employees forfeit the options by leaving the company before vesting or if their options expire unexercised.

Dividends payable in the company’s stock. Accounts payable—debit balances. Losses expected to be incurred within the next twelve months in excess of the company’s insurance coverage. Obligations arising from past transactions and payable in assets or services in the future. How is a contingency defined by the accounting profession? Accrued loss contingencies typically include.


Many costs are similar to warranties. Companies may offer coupons, prizes, rebates, air-miles, free hotel stays, free rentals, and similar items associated with sales activity. Each of these gives rise to the need to provide an estimated liability. While the details may vary, the basic procedures and outcomes are similar to those applied to warranties. Stock options are not recorded as an expense on companies’ books. But the arguments for this special treatment don’t stand up.

Unavoidable obligation. Present obligation that entails settlement retained earnings balance sheet by probable future transfer or use of cash, goods, or services.

Determinable Current Liabilities

Therefore, the liquidity—or lack thereof—of markets in stock options does not, by itself, lead to a discount in the option’s value to the holder. Imagine two companies, KapCorp and MerBod, competing in exactly the same line of business. The two differ only in the structure of their employee compensation packages. KapCorp pays its workers $400,000 in total compensation in the form of cash during the year. The net cash outflow to KapCorp is $300,000 ($400,000 in compensation expense less $100,000 from the sale of the options). APB 25 was obsolete within a year. The publication in 1973 of the Black-Scholes formula triggered a huge boom in markets for publicly traded options, a movement reinforced by the opening, also in 1973, of the Chicago Board Options Exchange.

Such events are recorded as an expense on the income statement and a liability on the balance sheet. A contingent liability is a liability that may occur depending on the outcome of an uncertain future event. A contingent liability is recorded if the contingency is likely and the amount of the liability can be reasonably estimated. The liability may be disclosed in a footnote on the financial statements unless both conditions are not met.


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