What situation represents a contingent liability for a company?
A)A candy company's monthly production requires 1000 kg of chocolate.The company entered into a contract with a chocolate producer to purchase 6000 kg of chocolate over the next six months at the market price.
B)A bike company learned that a racer using its bike was seriously injured in an accident on December 30,2018,as the front wheel of the bike was released as the result of a manufacturing defect.The company had not received a claim at December 31,2018,but management expects to receive a claim.
C)A restaurant received a $10 000 claim from a customer for emotional damages as a result of poor service.The legal counsel of the restaurant indicated that the claim was not supported and there was less than a 5% chance that the restaurant would have to pay.
D)A hotel chain was found guilty by a judge for not refunding customers who had online reservations.The hotel chain will have to pay $50 000 to various customers in the following year.

Question

Quizplus · Accepted Answer

A contingent liability is recognized when a company has a potential financial obligation due to a past event, the obligation is probable, and the amount can be reasonably estimated. In choice B, the bike company expects to receive a claim due to a manufacturing defect, which fits the criteria for a contingent liability. Choices A, C, and D do not meet all the criteria for a contingent liability as described.

What Situation Represents a Contingent Liability for a Company