Determine which of the following transactions represent contingent liabilities for Hermani Rental and indicate the proper accountingtreatment at the company’s fiscal year-end. Contingent liability?Accounting Treatment1. Hermani Rental cosigned a loan for $75,000 due in one year for Wyler Company.AnswerAnswerWyler is a very profitable company and is very liquid, making it a remote chance Hermani will have to pay the loan. 2. One of Hermani’s rental tents collapsed at a wedding and injured the bride and groom.AnswerAnswerHermani’s legal counsel believes it is probable that Hermani will have to pay damages of $400,000. 3. Hermani Rental is being audited by the Internal Revenue Service. Its tax returns forAnswerAnswerthe past two years are being examined. At the company’s year-end, the audit is still in process. Hermani’s CPA believes that payment of significant taxes is possible.

solution concept As per the relevant accounting standards contingent liability means the liability the outflow for which is dependent upon the future uncertain events Contingent liabilities shall be recognized as liability in the financial statements if the possibility of the economic outflow is higher or say more likely than not and the outflow is reliably measured otherwise it is disclosed on the foot note as contingent liability Contingent liability? Accounting Treatment 1. Hermani Rental cosigned a loan for $75,000 due in one year for Wyler Company. Wyler is a very profitable company and is very liquid, making it a remote chance Hermani will have to pay the loan. It is a contingent liability Since the outflow has only a remote chance and it is not more likely that the liability will arise Disclosed in the foot note of the financial statement 2. One of Hermani’s rental tents collapsed at a wedding and injured the bride and groom. Hermani’s legal counsel believes it is probable that Hermani will have to pay damages of $400,000. It is not a contingent liability Since the outflow is more likely and the amount can be reliably measured Liability of $400000 shall be recognized in the financial statement 3. Hermani Rental is being audited by the Internal Revenue Service. Its tax returns for the past two years are being examined. At the company’s year-end, the audit is still in process. Hermani’s CPA believes that payment of significant taxes is possible. It is a contingent liability Since the outflow is more likely but the amount can be reliably measured Disclosed in the foot note of the financial statement

Answered: Determine which of the following…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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Determine which of the following transactions represent contingent liabilities for Hermani Rental and indicate the proper accounting
treatment at the company’s fiscal year-end.

	Contingent liability?	Accounting Treatment
1. Hermani Rental cosigned a loan for $75,000 due in one year for Wyler Company.	Answer	Answer
Wyler is a very profitable company and is very liquid, making it a remote chance
Hermani will have to pay the loan.
2. One of Hermani’s rental tents collapsed at a wedding and injured the bride and groom.	Answer	Answer
Hermani’s legal counsel believes it is probable that Hermani will have to pay damages
of $400,000.
3. Hermani Rental is being audited by the Internal Revenue Service. Its tax returns for	Answer	Answer
the past two years are being examined. At the company’s year-end, the audit is still in
process. Hermani’s CPA believes that payment of significant taxes is possible.

Definition Definition Costs that a business is responsible for paying, should a particular event potentially occur in the future. Also called a potential liability, a contingent liability is generally recorded only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly. The Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Principles (IFRS) make it mandatory for the companies to record any contingent liability taking the principles of full disclosure, materiality, and prudence into consideration.

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