Which of the following would be defined as contingent liabilities?
I. A bank overdraft
II. A loan from a financial institution
III. An agreement to act as guarantor for another firm's borrowings
IV. An unresolved lawsuit brought against the entity for breach of health and safety regulations

Question

Quizplus · Accepted Answer

Contingent liabilities are potential liabilities that may arise in the future if certain events occur. Option III is a classic example of a contingent liability as a firm's agreement to serve as a guarantor on another company's debt obligations means that if the other company defaults on its debt payments, our firm will be liable to make those payments. Option IV also represents a contingent liability, as an unresolved lawsuit could result in our firm becoming legally obligated to make a payment to the plaintiff. Options I and II do not represent contingent liabilities, as a bank overdraft and a loan are both actual, current liabilities that must be recorded on the balance sheet.

Which of the Following Would Be Defined as Contingent Liabilities