A contingent liability is:
A) An obligation not requiring future payment.
B) Always of a specific amount.
C) An obligation arising from a future event.
D) An obligation arising from the purchase of goods or services on credit.
E) A potential obligation that depends on a future event arising from a past transaction or event.

Question

Quizplus · Accepted Answer

A contingent liability is a potential obligation that depends on a future event arising from a past transaction or event. It is not certain that the liability will occur, but there is a possibility. Contingent liabilities can arise from lawsuits, warranties, or guarantees. They are generally disclosed in the notes to the financial statements but are not recognized as liabilities on the balance sheet until they become probable and the amount can be estimated with reasonable accuracy. Choices A, B, C, and D do not accurately describe a contingent liability.

A Contingent Liability Is