Final answer:
A contingent liability should be accrued when a company is being sued and a loss is reasonably possible and reasonably estimable. Deducting life insurance premiums from employees' paychecks and the expectation of receiving a settlement in a lawsuit are not contingencies that should be accrued. However, offering a warranty and estimating the related expenses is a contingency that should be accrued.
Step-by-step explanation:
A contingent liability should be accrued when the company is being sued and a loss is reasonably possible and reasonably estimable. In this case, the company would need to estimate the potential loss and record it as an expense in its financial statements to reflect the impact on its financial position. This is done to ensure that the company accurately represents its financial obligations and to provide transparency to investors and stakeholders.
On the other hand, deducting life insurance premiums from employees' paychecks is not a contingency that should be accrued. It is a routine transaction related to employee benefits and does not involve any uncertain or potential future events.
Similarly, the expectation of receiving $100,000 in settlement of a lawsuit is not a contingency that should be accrued. It represents a gain that the company may receive, which would be recognized when the settlement is finalized and the company has the legal right to receive the amount.
However, offering a two-year warranty and estimating the related expenses is a contingency that should be accrued. The company is obligated to fulfill its warranty obligations, and therefore, it needs to estimate the cost of fulfilling those obligations and record it as an expense in its financial statements.