Under US GAAP, the low end of the range would be accrued, and the range disclosed. For example, Sierra Sports has a one-year warranty on part repairs and replacements for a soccer goal they sell. Sierra Sports notices that some of its soccer goals have rusted screws that require replacement, but they have already sold goals with this problem to customers.
It does not know the exact number of vacuums that will be returned under the warranty, so the amount must be estimated. Using historical averages, it estimates that 5% of those, or 500 vacuums will be returned under warranty per year. a contingent liability that is probable and for which the dollar amount can be estimated should be Vacuum Inc. should record a debit to warranty expense for $250,000 and a credit to a warranty liability account for $250,000. Failure to correctly recognize or disclose contingent liabilities can lead to serious implications.
What are the 3 types of contingent liabilities?
Legal counsel can aid in negotiation of contracts to limit the responsibility of the company for contingent liabilities. A proactive and strategic approach is crucial in mitigating the potential financial risks caused by contingent liabilities. In contingent liability, it often becomes difficult as there is no active market for such liabilities, and the timing and amount of the payment are uncertain. As such, the fair value of contingent liabilities involves a great deal of estimation and judgement. Although contingent liabilities are necessarily estimates, they only exist where it is probable that some amount of payment will be made. This is why they need to be reported via accounting procedures, and why they are regarded as “real” liabilities.
If the lawsuit results in a loss, a debit is applied to the accrued account (deduction) and cash is credited (reduced) by $2 million. Contingent liabilities are shown as liabilities on the balance sheet and as expenses on the income statement. If a court is likely to rule in favor of the plaintiff, whether because there is strong evidence of wrongdoing or some other factor, the company should report a contingent liability equal to probable damages.