n.29. Analyzing Contingent and Other Liabilities The following independent situa

Question

n.29. Analyzing Contingent and Other Liabilities The following independent situations represent various types of liabilities. Analyze each situation and indicate which of the following is the proper accounting treatment for the company: (a) record a liability on the balance sheet, (b) disclose the liability in a financial statement footnote, or (c) neither record nor disclose any liability. A stockholder has filed a lawsuit against Windsor Corporation. Clinch's attorneys have reviewed tne facts of the case. Their review revealed that similar lawsuits have never resulted in a cash award and it is highly unlikely that this lawsuit will either. Sterling Company signed a 60-day, 10% note when it purchased items from another company Environmental Protection Agency notifies Stark Industries that a state where it has a plant g a lawsuit for groundwater pollution against Stark and another company that has a plant nt to Stark's plant. Test results have not identified the exact source of the pollution. Stark's is fili 4. cturing process often produces by-products that can pollute groundwater. lin Company manufactured and sold products to a retailer that later sold the products to onisumers. Franklin Company will replace the product if it is found to be defective within 90 the sale to the consumer. Historically, 1.2% of the products are returned for replacement. e 7-6 t da

Explanation / Answer

At first we should understand what is contingent liabilities.

These are liabilities which may or may not arise happening of which depends on uncertain events or external events which are not in control of entity. And when it's to be reported and how-

When there is very low chance of loss then no treatment.

High probability and loss can be measured then make provision for contingencies.

And if there is situation with like neither low chances nor high chances then it should be disclosed in financial statements as foot note.

Based on above understanding we will answer these situations

1. As there is low probability in this case that it will result in cash reward so as per above explainations we will neither record nor disclose any liability.

2. As from case here Sterling co. Signed a 60 day 10% note when it purchased items from other company so resulting in payment in near future which itself is a liability and therefore it's goes with option a that is record a liability on the balance sheet.

3. As there are half half chances of lawsuit may prevail as conditions are not able to identify the source of pollution in test results but it's by products can pollute ground water so by considering both situations with equality conclusion can be made to disclose the liability in financial statements as foot not.

4. As there is very low chances of returning product for replacement that is 1.2% so option C is to be followed neither record nor disclose any liability.

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