Answered: Suits for damages totaling P8,000,000…

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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Suits for damages totaling P8,000,000 are pending against Freddy. The company lawyers
advised that losses on such suits are not probable. However, company policy has mandated authorization
that provision be made in the accounts for any possible loss up to P5,000,000. The suit was settled in
2021 and payment of P7,000,000 was made.

Required: Prepare the entry to record the contingent liability

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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