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Contingent Assets and Contingent Liabilities

Contingent Assets and Contingent Liabilities

Last Updated on: 11 May 2025 by Praju

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Question 1 of 30
1. Question
1. What is a contingent asset?
- (a) A definite asset arising from future events. (b) A possible asset arising from past events, confirmed by uncertain future events. (c) An obligation arising from past events. (d) A liability that must be recognized in the balance sheet. (e) An outflow of economic benefits.
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Question 2 of 30
2. Question
2. How should a contingent asset be treated in financial statements?
- (a) Recognized in the balance sheet. (b) Disclosed in the notes to accounts. (c) Recognized as income immediately. (d) Not recognized but may be disclosed in the approving authority's report if inflow is probable. (e) Adjusted against liabilities.
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Question 3 of 30
3. Question
3. Which of the following best describes a contingent liability?
- (a) A definite obligation with a certain outflow of resources. (b) A possible obligation or present obligation not meeting recognition criteria. (c) An asset that may arise in the future. (d) A provision for known liabilities. (e) A liability recognized in the income statement.
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Question 4 of 30
4. Question
4. When should a contingent liability be disclosed in the financial statements?
- (a) Only when the outflow is certain. (b) When the possibility of outflow is remote. (c) Unless the possibility of outflow is remote. (d) Never disclosed. (e) Only in the cash flow statement.
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Question 5 of 30
5. Question
5. What distinguishes a provision from a contingent liability?
- (a) Provisions are uncertain, while contingent liabilities are certain. (b) Provisions meet recognition criteria; contingent liabilities do not. (c) Contingent liabilities are always recognized in the balance sheet. (d) Provisions arise from future events. (e) Contingent liabilities require no estimation.
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Question 6 of 30
6. Question
6. Which of the following is an example of a contingent liability?
- (a) A bank loan payable next year. (b) A legal claim with an uncertain outcome. (c) Depreciation of machinery. (d) Salaries payable to employees. (e) Revenue from sales.
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Question 7 of 30
7. Question
7. When does a contingent asset become recognized in financial statements?
- (a) When it is possible. (b) When it is probable. (c) When realization is virtually certain. (d) When it is disclosed in notes. (e) When it is remote.
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Question 8 of 30
8. Question
8. What is the key difference between a liability and a contingent liability?
- (a) Liabilities are uncertain; contingent liabilities are certain. (b) Liabilities arise from future events; contingent liabilities arise from past events. (c) Liabilities are present obligations; contingent liabilities are possible obligations or present obligations not meeting recognition criteria. (d) Liabilities are disclosed in notes; contingent liabilities are recognized in the balance sheet. (e) Liabilities are always measurable.
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Question 9 of 30
9. Question
9. Which of the following is true about provisions?
- (a) They are possible obligations. (b) They cannot be estimated reliably. (c) They are recognized when an outflow of resources is probable and measurable. (d) They are disclosed only in the approving authority's report. (e) They arise from future events.
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Question 10 of 30
10. Question
10. A contingent liability arises from:
- (a) Future events only. (b) Past events only. (c) Past events with uncertain future outcomes. (d) Certain obligations. (e) Inflows of economic benefits.
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Question 11 of 30
11. Question
11. Contingent assets usually arise from:
- (a) Planned events. (b) Unplanned or unexpected events. (c) Certain future events. (d) Recognized liabilities. (e) Outflows of economic benefits.
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Question 12 of 30
12. Question
12. If an outflow for a contingent liability becomes probable, how is it treated?
- (a) Recognized as a provision. (b) Disclosed in notes. (c) Ignored. (d) Adjusted against assets. (e) Recognized as income.
Correct
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Question 13 of 30
13. Question
13. Which of the following is NOT a characteristic of a contingent liability?
- (a) It arises from past events. (b) Its existence depends on uncertain future events. (c) It is always recognized in the balance sheet. (d) It may be a possible obligation. (e) It requires disclosure unless outflow is remote.
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Question 14 of 30
14. Question
14. A contingent asset is disclosed in financial statements when:
- (a) It is possible. (b) It is probable. (c) It is certain. (d) It is remote. (e) It is estimated.
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Question 15 of 30
15. Question
15. Which of the following best describes the prudence concept in relation to contingent assets?
- (a) Recognize all possible assets immediately. (b) Recognize contingent assets when probable. (c) Avoid recognizing contingent assets to prevent overstatement of income. (d) Disclose contingent assets in the cash flow statement. (e) Offset contingent assets against liabilities.
Correct
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Question 16 of 30
16. Question
16. A company is sued for ₹10 lakhs. The outcome is uncertain. How should this be recorded?
- (a) Recognize as a liability. (b) Recognize as a provision. (c) Disclose as a contingent liability. (d) Ignore until the case is resolved. (e) Record as an expense immediately.
Correct
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Question 17 of 30
17. Question
17. A provision is recognized when:
- (a) The obligation is possible. (b) The amount cannot be estimated. (c) An outflow is probable and measurable. (d) The event is in the distant future. (e) It is a contingent liability.
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Question 18 of 30
18. Question
18. Which of the following is an example of a provision?
- (a) A disputed tax demand. (b) A warranty claim with estimated costs. (c) A potential legal win. (d) A bank guarantee. (e) A future contract.
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Question 19 of 30
19. Question
19. Contingent liabilities are assessed continually to determine whether:
- (a) They can be converted into assets. (b) An outflow of resources has become probable. (c) They should be recognized as income. (d) They can be ignored permanently. (e) They must be paid immediately.
Correct
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Question 20 of 30
20. Question
20. A contingent asset arises from:
- (a) Future contracts. (b) Past events with uncertain future confirmation. (c) Current liabilities. (d) Depreciation. (e) Recognized revenue.
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Question 21 of 30
21. Question
21. If a contingent liability becomes probable and measurable, it is reclassified as:
- (a) An asset. (b) A provision. (c) Revenue. (d) Equity. (e) An expense.
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Question 22 of 30
22. Question
22. Which of the following is a contingent liability?
- (a) Accounts payable. (b) Bank overdraft. (c) Pending court case with uncertain outcome. (d) Salaries payable. (e) Prepaid expenses.
Correct
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Question 23 of 30
23. Question
23. The primary reason for not recognizing a contingent asset is:
- (a) Lack of past events. (b) Risk of overstating income. (c) It is always immaterial. (d) Tax regulations prohibit it. (e) It is a future obligation.
Correct
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Question 24 of 30
24. Question
24. A company guarantees a loan for a subsidiary. This is an example of:
- (a) A provision. (b) A contingent liability. (c) A recognized liability. (d) An asset. (e) Revenue.
Correct
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Question 25 of 30
25. Question
25. Contingent liabilities are disclosed in:
- (a) The income statement. (b) The balance sheet as a liability. (c) The notes to financial statements. (d) The cash flow statement. (e) The equity statement.
Correct
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Question 26 of 30
26. Question
26. A contingent asset is recognized in financial statements only when:
- (a) It is possible. (b) It is probable. (c) It is virtually certain. (d) It is disputed. (e) It is estimated.
Correct
Incorrect
Question 27 of 30
27. Question
27. Which of the following is true about provisions and contingent liabilities?
- (a) Both are recognized in the balance sheet. (b) Provisions are uncertain; contingent liabilities are certain. (c) Provisions meet recognition criteria; contingent liabilities do not. (d) Contingent liabilities are always measurable. (e) Provisions arise from future events.
Correct
Incorrect
Question 28 of 30
28. Question
28. A company is likely to win a lawsuit for damages. How should this be treated?
- (a) Recognize as revenue. (b) Disclose as a contingent asset if probable. (c) Recognize as a liability. (d) Ignore until the case is won. (e) Offset against expenses.
Correct
Incorrect
Question 29 of 30
29. Question
29. The term “virtually certain” in the context of contingent assets means:
- (a) Possible but not confirmed. (b) Highly unlikely. (c) Almost sure (e.g., >95% probability). (d) A legal requirement. (e) An accounting estimate.
Correct
Incorrect
Question 30 of 30
30. Question
30. Which of the following is a key difference between liability and contingent liability?
- (a) Liabilities are future obligations; contingent liabilities are past obligations. (b) Liabilities are certain; contingent liabilities are uncertain. (c) Liabilities are disclosed in notes; contingent liabilities are recognized. (d) Liabilities arise from assets; contingent liabilities arise from equity. (e) Liabilities are always measurable.
Correct
Incorrect

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