Contingent liability is a likely obligation dependent on future events arising out of past transactions, such as a liability on account of a lawsuit depending on the outcome of the lawsuit. Accounting for contingent liability is based on the estimated future obligation if the event occurs. The entry to record the contingent liability based on the given separate situations.

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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.

Chapter 9, Problem 15QS

To determine

Concept Introduction:

Contingent liability is a likely obligation dependent on future events arising out of past transactions, such as a liability on account of a lawsuit depending on the outcome of the lawsuit. Accounting for contingent liability is based on the estimated future obligation if the event occurs.

The entry to record the contingent liability based on the given separate situations.

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Huprey Company is the defendant in the following legal claims. For each of the following separate claims, indicate whether Huprey should (a) record a liability, (b) disclose in notes, or (c) have no disclosure. 1. Huprey is very likely to lose a pending lawsuit. It reasonably estimates that damages paid will be $1,070,000. 2. It is reasonably possible that Huprey will lose a pending lawsuit. Huprey and its lawyers cannot estimate what the damages will be if it loses. 3. There is a remote (unlikely) chance Huprey will lose a pending lawsuit. The plaintiff is suing Huprey for $5,000,000. 4 4

We discussed contingent liabilities in class. Describe the conditions for when a contingent liability must be recorded through a journal entry, when it should be disclosed in the footnotes and when neither a journal entry nor disclosure is required? Assume that Mojito Corporation is sued by Dulcinea, Inc. for $1,000,000. Mojito’s attorneys believe that it is probable that the company will lose the suit and have to pay between $300,000 and $400,000 to Dulcinea. Based on your answer to a, what should Mojito do?

Swell Company has a lawsuit pending from a customer claiming damages of $100,000. Swell’s attorney advises that the likelihood the customer will win is remote. GAAP requires at a minimum that this contingent liability be a. disclosed in the footnotes. b. disclosed in the footnotes, with ranges of potential loss. c. recorded as a journal entry, as well as disclosed in the footnotes. d. No disclosure is required.

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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.

Chapter 9, Problem 15QS

To determine

Concept Introduction:

Contingent liability is a likely obligation dependent on future events arising out of past transactions, such as a liability on account of a lawsuit depending on the outcome of the lawsuit. Accounting for contingent liability is based on the estimated future obligation if the event occurs.

The entry to record the contingent liability based on the given separate situations.

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Answer 3

Question

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.

Chapter 9, Problem 15QS

To determine

Concept Introduction:

Contingent liability is a likely obligation dependent on future events arising out of past transactions, such as a liability on account of a lawsuit depending on the outcome of the lawsuit. Accounting for contingent liability is based on the estimated future obligation if the event occurs.

The entry to record the contingent liability based on the given separate situations.

Expert Solution & Answer

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Check out a sample textbook solution

See solution

Answer 4

Question

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.

Chapter 9, Problem 15QS

To determine