While I found it very interesting to focus on a specific aspect of financial accounting that is not clear-cut, the conclusive determination that contingency liabilities must be properly valued is quite compelling. As our courts have gone about slicing up the merits that distinguish between what is reasonable suspicion and probable cause, so I was able to compare to the concepts here with probable and possible definitions.
The website accountingcoach.com generally describes the topic as:
In accounting, a contingent liability and the related contingent loss are recorded with a journal entry only if the contingency is both probable and the amount can be estimated.
If a contingent liability is only possible (not probable), or if the amount cannot be estimated, a journal entry is not required. However, a disclosure is required.
When a contingent liability is remote (such as a nuisance suit), then neither a journal nor a disclosure is required.
Although these seem like very reasonable and understandable terms, what one entity decides is probable might be deemed possible by another. Just as something may be thought of as plausible rather than probable, the specificity of these standards are not to be taken lightly. Couple the liability with the need to reasonably estimate the value/amount and the disclosure versus journal entry issue seems to demand strong ethical practice.
Respond to the above statements.© BrainMass Inc. brainmass.com October 25, 2018, 9:43 am ad1c9bdddf
The judgment as to whether a contingent liability is probable or possible resides with management and because of the expense associated with one that is deemed probable - immediate ...
The solution discusses contingent liability in the context of the case provided.
Discussion on estimated current liabilities
There are two types of current liabilities that must be estimated. Describe them and explain why they must be estimated. How are the financial statements affected if they are not estimated?
Respond to the following post.
Estimated Warranty Payable and Contingent Liabilities are two types of current liabilities that must be estimated. Estimated Warranty Payable - matches the warranty expense in the same period as revenue is recorded for the warranty (Horngren, Harrison, & Oliver, 2012). For instance, Myrick's Tires may not know the exact amount of its warranty expense and assumes that 2% of its sales will need repairs or replacement. As of May 4, 2012, $30,000 of its sales is subjected to warranty. Myrick's Tires estimates a warranty expense of $600.00 and records this amount in the same period as the revenue earned for the warranty. Contingent liabilities are potential liabilities that depend upon future events before becoming actual liabilities. Suppose a customer threatens to sue Myrick's Tires for faulty equipment and depending whether or not the customer has a valid case; Myrick's Tires may be required to pay the customer damages. However, Myrick's Tires will not record an expense or actual liability based upon an estimated amount until it is more likely that the lawsuit will ensue.View Full Posting Details