Contingent Liability

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Submitted By SISTAZ
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What is a contingent liability?

A contingent liability is a potential liability…it depends on a future event occurring or not occurring. For example, if a parent guarantees a daughter’s first car loan, the parent has a contingent liability. If the daughter makes her car payments and pays off the loan, the parent will have no liability. If the daughter fails to make the payments, the parent will have a liability.

If a company is sued by a former employee for $500,000 for age discrimination, the company has a contingent liability. If the company is found guilty, it will have a liability. However, if the company is not found guilty, the company will not have an actual liability.

In accounting, a contingent liability and the related contingent loss are recorded with a journal entry only if the contingency is both probable and the amount can be estimated.

If a contingent liability is only possible (not probable), or if the amount cannot be estimated, a journal entry is not required. However, a disclosure is required.

When a contingent liability is remote (such as a nuisance suit), then neither a journal nor a disclosure is required.

A product warranty is often cited as a contingent liability that is both probable and can be estimated.

What is the difference between a contingent liability and an estimated liability?
A contingent liability is a potential liability (and a potential loss). It is dependent upon a future event occurring or not occurring. For instance, if someone files a lawsuit against Jay Corp, Jay Corp will have a contingent liability. The lawsuit liability is dependent upon Jay Corp losing the lawsuit. (Some lawsuits are nuisance suits and will not cause a loss and liability.) When a contingent liability and loss are probable and the amount can be estimated, an estimated amount will be recorded as a liability.

Some liabilities are…...

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