Question

Ruby Bhd has been sued by its supplier due to breach of contract. Discuss whether a liability can be recognized assuming that: a) It is probable that Ruby Bhd would be liable for RM500,000 as a result of lawsuit; b) It is not probable that Ruby Bhd would be liable for RM500,000. c) It is probable that Ruby Bhd would be liable, however the legal advisors could not estimate the liability amount reliably.

Answer 1

A contigent liability is the liability which may occur depending upon uncertain future events.

A contigent liability is recognised if it is

i)probable to occur and

ii)the amount of liability can be reasonably estimated.

So, in the given case ruby bhd has been sued due to breach of contract so laibility will arise based on future events.That is if we loose the case.So this is contigent liability case.

Now lets look how is liability recognised in each case

1) In the given case it is probable that Ruby bhd will be liable for RM500,000.So here the contigent liability should be recpgnised as it fulfill the two conditions to be recognised i.e. It is probable that liability will occur and also the amount of laibility can be reasonabaly estiamated to be RM500,000.

Liability recognised at RM500,000

2)

In the given case it is NOT probable that Ruby bhd will be liable although the amount is estimated atRM500,000.So here the contigent liability should not be recpgnised as it does not fulfill one of the two conditions to be recognised i.e. It is not probable that liability will occur.

So no laibility recognised.

3)

In the given case it is probable that Ruby bhd will be liable although the amount of liability can not be reasonabaly estimated.So here the contigent liability should not be recognised as it does not fulfill one of the two conditions to be recognised i.e. the amount of liability can not be reasonabaly estimated.

So no laibility recognised.

Hope it helps!!

Kindly do give a feedback!