Question

Which of the following would be considered a contingent liability?

A. Warranties payable

B. Pending litigation

C. Salaries payable

D. Federal income tax payable

Answer 1

Pending litigation is considered a contingent liability because it reflects a potential financial obligation based on an uncertain future event, differing from actual, present obligations like salaries or taxes payable.

Step-by-step explanation:

Among the options provided, B. Pending litigation would be considered a contingent liability. A contingent liability is a potential financial obligation that may arise in the future based on the outcome of an uncertain event. Warranties payable could also be seen as a type of contingent liability as they are future obligations dependent on the occurrence of certain events, such as products failing to perform as intended. However, it is typically categorized separately on financial statements under warranty reserves. In contrast, salaries payable and federal income tax payable are both actual, present obligations, and thus do not fall under the category of contingent liabilities.