Question 1
(Miller-Nobles, Mattison, & Matsumura, 2018) states that a contingent liability is related to the happening of a future event unexpectedly. If the happening comes to pass, then it becomes a liability. It is difficult for the company to know whether or now the event will be paid for and, hence, the organization has to factor in three options. These are the factors that determine whether contingent liabilities must be recorded. One should consider whether the liability is probable, reasonably possible, or remote. For remote liabilities, the events have a minimal probability of happening and, hence, may not be recorded. For reasonable possible liabilities, the events have a medium probability of happening and, hence, may be recorded. Probable liabilities, there are high chances of the events happening and hence such should be recorded.
Question 2
Current liabilities that have to be estimated by an organization include vacation, pension, plans, warranties, and health coverage. Bonus plans have an equation that can be used to account for them. (Bonus % x Net income before bonus) / (1+ Bonus %) (Miller-Nobles, Mattison, & Matsumura, 2018). Pension, health, and vacation should all be recorded and an amount given from the company every year to cater for these expenses. Warranties are different in that they have limits. The warranty expenses can be recorded at the same time the organization is recording the revenue associated with the warranty. This helps the company not to show claims but sales.
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Question 3
The payroll process comes with several liabilities which include the net and gross pay expenses, and payroll withholdings which are liabilities. Examples of payroll withholdings the Medicare, OASDI, income taxes, and the Federal Insurance Contributions Act (FICA) contributions. Liabilities generated by the payroll process should be known because all records should be accounted for if the accounts are to balance (Nobanee & Abraham, 2015) . In some cases, the government may demand accounting records from companies and it is important for these records to have been accurately captured.
References
Miller-Nobles, T. L., Mattison, B. L., & Matsumura, E. M. (2018). Horngren’s accounting (12th ed.). Retrieved from https://pearson.com
Nobanee, H., & Abraham, J. (2015). Current assets management of small enterprises. Journal of Economic Studies , 42 (4), 549-560.
