Question

The following three independent sets of facts relate to contingent liabilities:

(1) In November of the current year, an automobile manufacturing company recalled all pickup trucks manufactured during the past two years. A flaw in the battery cable was discovered and the recall provides for replacement of the defective cables. The estimated cost of this recall is $2.3 million.
(2) The EPA has notified a company of violations of environmental laws relating to hazardous waste. These actions seek cleanup costs, penalties, and damages to property. The company is reasonably certain there will be cost associated with the cleanup, but cannot estimate the amount. The cleanup cost could be as high as $4,030,000 or as little as $530,000 and insurance could reimburse all or part of the cost. There is no way to more accurately estimate the cost to the company at this time. (3) Holland Company does not carry property damage insurance because of the cost. The company has suffered substantial losses each of the past three years. However, it has had no losses for the current year. Management thinks this is too good to be true and is sure there will be significant losses in the coming year. However, the exact amount cannot be determined.

What are three categories of contingent liabilities?

Answer 1

What are three categories of contingent liabilities?

1. Probable Contingency

2. Reasonable possible

3. Remote

1. Probable Contingency: The liability is probable in occurrence, and an estimate is available.

2. Reasonable possible: The liability is possible, but an estimate is not available

3. Remote: Liability is not recorded or disclosed

Step-by-step explanation:

Contingent liability

A contingent liability is a liability of a company that depends on a future event on the basis of a past transaction. It may be called probable liability or an eventual liability. It may or may not become a liability of a company is entirely depends on future events.

The following are the examples of contingent liabilities:

• Lawsuits

• Income tax disputes

• Discounted notes receivable

• Credit guarantees

• Failure to follow government regulations