13RQ - Horngren'S Financial And Managerial Accounting

Question

What is contingent liability? Provide some examples of contingencies.

Step-by-Step Solution

Answer

Contingent liabilities are potential but not actual and depend upon some future event. 

Step 1: Contingent Liability

A contingent liability is an obligation that is based on a future event. This is a potential liability and not an actual liability. It is called contingent because it cannot be confirmed in present but can only be made sure after the happening of any future event.

Step 2: Examples of contingencies

Some examples of the contingencies are as follow:

a) Claim over patent infringement

b) Any kind of lawsuit against the company

c)  Warranty expense

d) Co-signing a notes payable

e) Giving a guarantee for third parties etc.