In an examination of Marco Company Ltd as of 31 December 20X0, the following situations exist. No entries in respect to them have been made in the accounting records.

1. Marco Company Ltd has guaranteed the payment of interest on the 10-year, first-mortgage loans of Newart Company, an associated company. Outstanding loans of Newart Company amount to $150 000 with interest payable at 5% per annum, due 1 June and 1 December of each year. The loans were taken out by Newart Company on 1 December 20X8, and all interest payments have been met by that company with the exception of the payment due on 1 December 20X0. Marco Company states that it will pay the defaulted interest to the lenders on 15 January 20X1.

2. During the year 20X0, Marco Company was named as a defendant in a legal action for damages by Dalton Company Ltd for breach of contract. An adverse decision to Marco Company was rendered and Dalton Company was awarded $40 000 damages. At the time of the audit, the case was under appeal to a higher court.

3. On 23 December 20X0, Marco Company declared a bonus issue of 1000 shares with a par value of $100 000 of its ordinary shares, payable 2 February 20X1 to the ordinary shareholders on record as at 30 December 20X0.

REQUIRED

a. Define contingent liability.

b. Describe the audit procedures you would use to learn about each of the situations above.

c. Describe the nature of the adjusting entries or disclosure, if any, you would make for each of these situations.