A fitness club gives clients a free month after they have paid for eleven months. Approximately half of their clients remain with the club long enough to take advantage of this offer. Required: Define the term “Liability”. Then explain whether the free month offer results in a liability for the fitness club. Explain what makes a liability “current”. Then explain whether the free month offer results in a current liability for the fitness club. Define the term “contingent liability”. Then explain whether the free month offer results in a contingent liability for the fitness club.

Step 1 Liabilities are the obligations of the entity which are they bound to settle.

Answered: A fitness club gives clients a free…

Financial Accounting Intro Concepts Meth/Uses

14th Edition

ISBN:9781285595047

Author:Weil

Publisher:Weil

Chapter11: Notes, Bonds, And Leases

Section: Chapter Questions

Problem 9Q

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A fitness club gives clients a free month after they have paid for eleven months. Approximately half of their clients remain with the club long enough to take advantage of this offer.

Required:

Define the term “Liability”. Then explain whether the free month offer results

in a liability for the fitness club.

Explain what makes a liability “current”. Then explain whether the free

month offer results in a current liability for the fitness club.

Define the term “contingent liability”. Then explain whether the free month

offer results in a contingent liability for the fitness club.

Definition Definition Costs that a business is responsible for paying, should a particular event potentially occur in the future. Also called a potential liability, a contingent liability is generally recorded only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly. The Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Principles (IFRS) make it mandatory for the companies to record any contingent liability taking the principles of full disclosure, materiality, and prudence into consideration.

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