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On 31 December 20x7, F Ltd acquired 60% of G Ltd. On this date, F Ltd...

On 31 December 20x7, F Ltd acquired 60% of G Ltd. On this date, F Ltd and G Ltd each reported a contingent liability under which there is a 30% probability of paying a damage claim of $100,000 to a third party. In August 20x8, F Ltd and G Ltd settled their respective contingent liability out of court by each paying $50,000 to the third party.

In F Ltd’s 20x7 consolidated financial statements (* delete those not applicable)

F Ltd’s contingent liability will be *

(i) disclosed as a contingent liability in the notes to financial statements

(ii) recognized as a liability in the balance sheet at $100,000

(iii) recognized as a liability in the balance sheet at $30,000

G Ltd’s contingent liability will be *

(i) disclosed as a contingent liability in the notes to financial statements

(ii) recognized as a liability in the balance sheet at $100,000

(iii) recognized as a liability in the balance sheet at $30,000

In F Ltd’s 20x8 consolidated financial statements:

Litigation loss = $............................................................................................

Solutions

Expert Solution

Contingent liabilities are liabilities which are dependent on uncertain event. Most of them are related to law suits which may or may not be on the company's favour but it gives an estimate to the stakeholders of the amount of liabillity that the company might need to pay if the law suit is not in its favour.

Contingent liabilities are not recorded on the balance sheet as they are contingent one and might be disclosed as an off balance sheet item as notes to accounts to give sufficient information to the readers of the financial statements.

a) For 20X7, for F Ltd consolidated financial statements, the right answer is option i) "disclosed as a contingent liability in the notes to financial statements" for the reasons stated above. The other answers are incorrect as contingent liability is not reported as part of the balance sheet.

b) For 20X7, for G Ltd, the right answer is option i) "disclosed as a contingent liability in the notes to financial statements" for the reasons stated above. The other answers are incorrect as contingent liability is not reported as part of the balance sheet.

c) Litigation loss for F Ltd consolidated financial statement is as below:

F Ltd (100% of the amount paid to third party) = $50,000
G Ltd (60% share of the amount paid to third party, F Ltd holding in G Ltd) = $50,000*60% = $30,000

Total Litigation loss (100% amount paid by F Ltd to the third party + 60% share of F Ltd in G Ltd of the amount paid by G Ltd to the third party) = $50,000+$30,000 = $80,000

ekkarill92 answered 1 year ago
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