When a note receivable is discounted, the business that endorses the note becomes potentially liable to the bank. This type of liability is called a:
A) dependent liability.
B) contingent liability.
C) potential liability.
D) conditional liability.

Question

Quizplus · Accepted Answer

Contingent liability is the correct term because it refers to a potential financial obligation that may arise in the future, depending on the occurrence of a certain event. In the context of discounting a note receivable, if the maker of the note fails to pay, the endorser (the business) becomes liable to the bank, making it a contingent liability.

When a Note Receivable Is Discounted, the Business That Endorses