Canada Contingent Liabilities Question

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Hi Everyone,

I am having trouble figuring out how an entry should be accounted and what the appropriate accounts would be for in a similar situation as the following:

Company A has completed services for Company B, let's say the services are worth $500.00.

In exchange for the services, Company B agrees to sell Company A materials at a cost minus what the services are worth, (the cost will be higher than the services) on the condition a sale of a product that needs the materials is made.

The probability of a sale happening is quite high, however, if it is not made then they will not be paid for the services that were completed.

I would also like to know how the loss would be recorded if the sale would become unlikely.

I appreciate your help!

--Amber
 

Fidget

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I'm not sure where you're seeing a Contingent Liability. Contingent liabilities have to be a possibility on account of something that has already happened. Your scenario is based around an exchange *if* a *future* condition comes to pass, and is therefore a derivative.
 
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Okay,

So how would this be accounted for in Journal Entry format then?

I was told that this type of transaction needs to be accounted for as a Contingent Liability and have been overthinking every part of it on how to make this work and why.

Sadly, I do not have proper accounts to work with and for some reason I cannot even think through how it would be accounted for when a service (like contract work) is completed in exchange for materials. I am completely blanking as to the proper account name, as well as the type of account.

When I think of this transaction I consider the services (which happen to be contract work and fully completed to date) as a non-refundable pre-payment to Raw Materials that will or will not be bought in the future.

Since, the probablity of the sale is likely to happen, in my mind I believe it a provision would need to be created for the estimated amount minus the fair value of the contract work.

I know this could be completely wrong, but i cannot wrap my mind around this, so any bit of detail would be great.
 

Fidget

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Which accounting standards are you working under?
 

Fidget

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I don't know what the best way to account for it is.

I'd be inclined to do nothing in terms of recording of the transaction that only happens should a future event happen.
 

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