Accounting Treatment of Contingent Assets and Contingent Liabilities in case of Dissolution of a firm
Contingent Assets:
A Contingent Asset is an economic gain that may come into existence in near future as a result of some past action. The existence of such assets is completely uncertain and beyond the control of the entity.
Example: Any property of a firm under some legal suit, and warranty received by a firm.
Contingent Liabilities:
A Contingent Liability is a liability, the existence of which depends upon the happening of some future events. Like Contingent Assets, Contingent Liabilities are uncertain and beyond the control of the entity.
Example: Any compensation likely to be paid in near future as a result of some lawsuit, warranty given by the firm, discounting, or endorsement of bills.
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.
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