Randall GoKarts sells motorized gokarts Randall GoKarts are

Randall Go-Karts sells motorized go-karts. Randall Go-Karts are motorized and are typically purchased by amusement parks and other recreation facilities, but are also occasionally purchased by individuals for their own personal use. The company uses a perpetual inventory system. Selected transactions in the month of December follow (Click the icon to view the transactions.) Requirement 1. Describe how each of the contingent liabilities in the selected December transactions would be treated in Randall\'s financial statements for 2019 Select four answers.) ? A. Dec 27 transaction will be reported as a liability on the balance sheet and an expense on the income statement. Transaction will not be footnoted since it is recorded on the financial statements. B. Dec 22 transaction will not be footnoted because it is unlikely to be a loss ? C. Dec 5 transaction will be reported as a liability on the balance sheet and an expense on the income statement. Transaction will also be footnoted D. Dec 5 transaction will be footnoted as a contingent liability ? E. Dec 31 transaction will be reported as a liability on the balance sheet and an expense on the income statement. Transaction will also be footnoted ? F. Dec 31 transaction will be reported as a liability on the balance sheet and an expense on the income statement. Transaction will not be footnoted since it is recorded on the financial statements. ? G. Dec 27 transaction will be reported as a liability on the balance sheet and a loss on the income statement. Transaction will also be footnoted H. Dec 22 transaction will be footnoted as a contingent liability

Solution

Contingent Liability are liabilities that may be incurred by an entity depending on the outcome of an uncertainty future event as the outcome of an pending lawsuit. These liabilities are not recorded in a company’s accounts and shown in the balance sheet when both probable and reasonably estimable as contingency or worst case financial outcome.

A contingent liability that is both probable and the amount can be estimated is recorded as :

As a result a contingent liability is also referred as a loss of contingency. Warranties are cited as a contingent liability that meets both of the required conditions .Warranties will be recorded at the time of the product’s sale with a debit to warranty Expense and credit to warranty liability .

A loss of contingency which is possible but not probable or the amount cannot be estimated, will not be recorded in the accounts. Rather it will be disclosed in the notes to the financial statement.

Looking at the above statement A. Is one of the answer because both the conditions are prevalent the amount is estimates and the loss is probable.

Second Option is D. In this case the loss is probable but the amount is not estimated correctly and therefore it becomes an addition in the footnoted as contingent liability in the books of accounts.

F. As it is explained above that warranties become a part of the books of accounts and therefore not required to be footnoted.

H. the transaction will be footnoted as contingent liability as its a law suit and there are probable chances to lose as well as the amount has been estimated in case of loss. Therefore it will be footnoted and not recorded in the books of accounts.