Answered: In March 2016, Emett Motors began…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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In March 2016, Emett Motors began selling extended warranties for the vehicles it sells. The extended warranties cover parts and labor for all repairs to brakes and powertrain. Emett sold $10,000 of the extended warranties in March, and estimates that it will incur $6,000 of cost over the five-year time period to fulfill them (the present value of the $6,000 is $5,000). In March 2016, Emett would record: a. A contingent liability of $6,000 b. A contingent liability of $5,000 c. Deferred revenue of $10,000 d. Both (a) and (c) are correct.

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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