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Financial Statements of NPO

Contingent li...

Question

Contingent liability is taken due to ___________.

A

Convention of Full Disclosure

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B

Convention of Conservatism

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C

Convention of Materiality

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D

Dual Aspect Concept

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Solution

The correct option is A Convention of Full Disclosure
The principle of full disclosure requires that all material and relevant facts concerning financial performance of an enterprise must be fully and completely disclosed in the financial statements and their accompanying footnotes.
This is to enable the users to make correct assessment about the profitability and financial soundness of the enterprise and help them to take informed decisions.
Contingent liability is a potential liability which may occur depending on the outcome of an uncertain future event. This has to be shown as notes to accounts.

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Q. Under which conventions of accounting, the contingent liabilities are shown as a footnote or explanatory notes in the balance sheet of a firm:

State true of false :

A contingent liabilities can also be called doubtful liabilities.

Q. Assertion :Contingent Liabilities is included in the total of the liability side of the balance sheet of a company. Reason: Contingent liabilities are those which may or may not arise in future.

Q. What Journal entries would be passed for discharge of following unrecorded liabilities on the dissolution of a firm of partners A and B:
(a) There was a contingent liability in respect of bills discounted but not matured of ₹ 18,500. An acceptor of one bill of ₹ 2,500 became insolvent and fifty paise in a rupee was recovered. The liability of the firm on account of this bill discounted and dishonoured has not so far been recorded.
(b) There was a contingent liability in respect of a claim for damages for ₹ 75,000, such liability was settled for ₹ 50,000 and paid by the partner A.
(c) Firm will have to pay ₹ 10,000 as compensation to an injured employee, which was a contingent liability not accepted by the firm.
(d) ₹ 5,000 for damages claimed by a customer has been disputed by the firm. It was settled at 70% by a compromise between the customer and the firm.

Q. What Journal entries would be passed for following unrecorded liabilities on the dissolution of a firm partners A and B:
(a) There was a contingent liability in respect of bills discounted but not matured of Rs. 18,500. An acceptor of one bill of Rs. 2,500 became insolvent and fifty paise in a rupee was recovered. The liability of the firm on accout of this bill discounted and dishonoured has not so far been recorded.
(b) There was a contingent liability in respect of claim for damages for Rs. 75,000, such liability was settled for Rs. 50,000, and paid by the partner A.
(c) Firm will have to pay Rs. 10,000 as compensation to an injured employee, which was a contingent liability not accepted by firm.
(d) Rs. 5,000 for damages claimed by a customer has been disputed by the firm. It was settled at 70% by a compromise between the custorner and the firm.

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