Contingent Assets:
A Contingent Asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events that are not wholly within the control of the entity. Such assets are not recognized in the financial statements because the realization of the economic benefit is uncertain. They are disclosed only when the inflow of economic benefits is probable.
Examples:
- A claim for damages under a lawsuit filed by the firm.
- An insurance claim whose acceptance is uncertain.
- A tax refund under dispute.
Contingent Liabilities:
A possible obligation arising from past events whose existence will be confirmed by uncertain future events not wholly within the control of the entity; A present obligation arising from past events that is not recognized because either the outflow of resources is not probable or the amount cannot be measured reliably.
Contingent liabilities are not recognized as liabilities in the balance sheet but are disclosed in the notes to accounts unless the possibility of outflow is remote.
Examples:
- A lawsuit against the firm where the outcome is uncertain.
- Warranty obligations on products sold.
- Liability on bills discounted or endorsed that may become payable in the future.
- Guarantees given by the firm on behalf of another party
Accounting Treatment of Contingent Assets:
(i) Contingent Assets realised for Cash:
A Contingent Asset, if any, like any other asset is transferred to the credit side of a Realisation Account on being realised for cash.
Journal Entry:
(ii) If any of the partners take over Contingent Assets and agrees to pay for the same:
A Contingent Asset when taken over by a partner, is transferred to the credit side of a Realisation Account and debited to Concerned Partner's Capital Account.
Journal Entry:
Accounting Treatment of Contingent Liabilities:
(i) Contingent Liabilities paid off:
Like any other liability, the Contingent Liability is also paid off and is transferred to the debit side of a Realisation Account.
Journal Entry:
(ii) If any of the partners agrees to settle a Contingent Liability:
A Contingent Liability when taken over by a partner, is transferred to the debit side of a Realisation Account and credited to Concerned Partner's Capital Account.
Journal Entry:
Illustration:
Raman, Sita and Anand were partners sharing Profit in the ratio of 2 : 2 : 1. Their Balance Sheet on 31st March 2020 stood as:
Additional Information:
1. Assets realised as:
Stock - ₹ 67,200
Debtors - 90% of value
Machinery - ₹ 1,32,000
2. Sita took over the Investment at ₹ 28,800 and also agrees to pay the outstanding salary.
3. Patents were valueless.
4. A Bill Receivable of ₹ 7,200 was discounted from a bank, but on the due date, the Customer become insolvent and paid only 70 paise in a rupee.
5. Creditors realised for ₹ 64,800.
6. Realisation expenses amounted to ₹ 2,880.
Prepare Realisation Account, Partner's Loan Account, Partner's Capital Account and Cash Account and pass necessary Journal Entries.
Solution:
Working Notes:
1. Total Realised Value of Assets:
Stock = 67,200
Debtors = 62,640
Machinery = 1,32,000
Bill Receivable (Contingent Asset) = 5,040
Total = 2,66,880
2. Total Liabilities Realised:
Creditors = 64,800
Bill Receivable
(Contingent Liability) = 7,200
Short-term Loan = 48,000
Total = 1,20,000
Note: Full value of the Bill Receivable is considered as Contingent Liability because the full amount is to be returned to the Bank. However, 70% of it is received hence that part is considered as Contingent Asset.