Final answer:
The three types of contingent liabilities are product warranties, lawsuits and legal claims, and guarantees. Contingent liabilities are recorded in a company's financial statements as footnotes or disclosures.
Step-by-step explanation:
The three types of contingent liabilities are:
- Product Warranties - These are liabilities that arise when a company offers warranties on its products. For example, if a company sells electronic devices with a warranty period of one year, they need to record an estimated liability for potential warranty claims.
- Lawsuits and Legal Claims - These are liabilities that arise when a company is involved in legal disputes or faces potential legal claims. For example, if a company is being sued for patent infringement, they need to record a liability for potential damages.
- Guarantees - These are liabilities that arise when a company guarantees the performance or payment of another party. For example, if a company guarantees a loan taken by another company, they need to record a liability for potential default.
Contingent liabilities are recorded in a company's financial statements as footnotes or disclosures. They are not recorded on the balance sheet as actual liabilities unless the probability of occurrence is high, and the amount can be reasonably estimated.