Chapter 13, Problem 13.8BYP

To determine

1 and 2

Contingent Liability

Contingent liability is one form of liability that arises based on a particular outcome of a specific event. They are possible obligation that might arise or might not arise based on the future events. It is otherwise called as probable liability or eventual liability. Following are examples of contingencies:

• Income tax disputes
• Discounted notes receivable
• Lawsuits
• Debt guarantees
• Failure to follow government regulations

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit all increase in liabilities, revenues, and stockholders’ equities, and all decrease in assets and expenses.

To prepare: Appropriate reporting of each situation and memo to audit manager explaining reasons for each situations.