Analyze the following independent situations. Required: For each situation, state the likelihood of a future event and state how the contingency will be reported.

Question

a. Company A estimates it will have to pay $85,000 in warranty repairs next year.
b. Company B is being sued by a customer. Company B's attorneys feel that this is a frivolous lawsuit and
there is very little chance that the customer will win.
c. Company C co-signed a note payable for Company D. Company D is having serious financial problems
and it is reasonably possible that Company C will have to pay the note.
d. Company E is being sued for a patent infringement. Company E's attorney feels that Company E will
be found liable for damages caused by the patent infringement. However, the attorney states it is not
possible to estimate the amount of the award.

Answer 1

a. This is a probable contingent liability that can be estimated. Company A will record a contingent liability
and an expense will be accrued.
b. This is a remote contingent liability. Company B does not need to record a liability and does not need
to disclose this in the notes to the financial statements.
c. This is a reasonably possible contingent liability. This situation needs to be described in the notes to
Company C's financial statements.
d. This is a probable contingent liability that cannot be estimated. Company E needs to disclose this
situation in the notes to the financial statements.