Contingent Liabilities Several independent items are listed for which the outcome of events is unknown at year-end.

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Contingent Liabilities Several independent items are listed for which the outcome of events is unknown at year-end.
a. A company offers a two-year warranty on sales of new computers. It believes that 4% of the computers will require repairs.
b. A company is involved in a trademark infringement suit. The company’s legal experts believe that an award of $500,000 in the company’s favor will be made.
c. A company is involved in an environmental cleanup lawsuit. The company’s legal counsel believes that the outcome may be unfavorable but has not been able to estimate the costs of the possible loss.
d. A soap manufacturer has included a coupon offer in the Sunday newspaper supplements. The manufacturer estimates that 25% of the 50¢ coupons will be redeemed.
e. A company has been sued by the federal government for price fixing. The company’s legal counsel believes that there will be an unfavorable verdict and has made an estimate of the probable loss.

Required
1. Identify which of the items (a) through (e) should be recorded at year-end.
2. Identify which of the items (a) through (e) should not be recorded but should be disclosed in the year-end financial statements.

Contingent liabilities
A contingent liability is an obligation of business related to an uncertain future event. The business must record it in its financial statements if the amount can be reliably estimated and it is probable that amount will be paid by business as a...
Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...
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