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 30th, 2015, 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 31st, 2015, 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 a potential liability that may or may not occur depending on the outcome of a future event. In this case, the bike company expects to receive a claim for the injury caused by a manufacturing defect, but has not yet received one as of December 31st, 2015. Therefore, this represents a contingent liability for the company. Choices A, C, and D are not contingent liabilities as they already have existing contracts, legal claims or obligations to pay.

What Situation Represents a Contingent Liability for a Company