In an examination of Marco Corporation as of December 31, 2001, the following situations exist. No related entries have been made in the accounting records.

1. Marco Corporation has guaranteed the payment of interest on the 10-year, first mortgage bonds of Chen Corp., an affiliate. Outstanding bonds of Chen Corp. amount to $150,000 with interest payable at 8 percent per annum, due June 1 and December 1 each year. The bonds were issued by Chen on December 31, 1999, and all interest payments have been met by that company with the exception of the payment due December 1, 2001. The Marco Corporation states that it will pay the defaulted interest to the bondholders on January 15, 2002.

2. During the year 2001, Marco Corporation was named as a defendant in a suit for damages by Dalton Inc. for breach of contract. A decision adverse to Marco Corporation was rendered, and Dalton Inc. was awarded $40,000 in damages. At the time of the audit, the case was under appeal to a higher court.

3. On December 23, 2001, Marco Corporation declared a common share dividend of 1,000 shares with a stated value of $100,000 of its common stock, payable February 2, 2002, to the common shareholders of record December 30, 2001.

Required

a. Define "contingent liability."

b. Describe the audit procedures that you would use to learn about each of the above situations.

c. Describe the nature of the adjusting entries or disclosure, if any, that you would require for each of these situations.

(AICPA adapted)