Question

Assertion (A): Contingent Liabilities are not the liabilities payable yet but may become liabilities when an event associated with it happens in future.

Reason (R): Proposed Dividend is a Contingent Liability because it will become a liability after the shareholders declare, i.e., approve it.

In the context of the above two statements, which option is correct?

Options

• Both Assertion (A) and Reason (R) are correct, but Reason (R) is not the correct explanation for Assertion (A).

• Both Assertion (A) and Reason (R) are correct, and Reason (R) is the correct explanation for Assertion (A).

• Only Assertion (A) is correct.

• Both Assertion (A) and Reason (R) are not correct.

Answer 1

Both Assertion (A) and Reason (R) are correct, but Reason (R) is not the correct explanation for Assertion (A).

Explanation:

Assertion (A) is correct; contingent liabilities are potential obligations that depend on the occurrence of future events. Reason (R) is also correct in stating that a proposed (final) dividend is contingent on shareholder approval and is disclosed as a contingent liability in the notes until declared, but R is an example rather than the explanation of the general definition in A; therefore, R does not explain A.