Contingent Liabilities – The CEO of Smith & Sons, Inc., negotiated with its principal supplier of...

Contingent Liabilities – The CEO of Smith & Sons, Inc., negotiated with its principal supplier of raw materials to purchase 10,000 units for a total price of $100,000. The units are to be delivered in 90 days. The CEO is uncertain whether she should record the purchase commitment on the company’s balance sheet as a liability or not. She asks for your advice. What would you advise her?

Expert Solution

A contingent liability is a potential loss that can occur in future depending on the outcome of future events. For a loss to be recorded as contingent liability it must be probable and amount of loss could be estimated.

Since by the negotiation to purchase the material in future, the company may incur a loss if the price of the material decreases below the agreed price. But the amount of loss cannot be estimated as it depends on the future price of material which is not known.

Hence it cannot be recorded as a contingent liability.

ekkarill92 answered 2 years ago

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