When the amount of a contingent liability can be estimated and its likelihood is possible but not probable, the company should:
A) include a description in the footnotes to the financial statements.
B) record the amount of the liability times the probability of its occurrence.
C) record the amount of the liability as a long-term liability.
D) omit the information about the contingent liability from its financial statements and footnotes.

Question

Quizplus · Accepted Answer

When a contingent liability can be estimated, it should be disclosed in the footnotes to the financial statements, even if it is possible but not probable. This ensures that investors and other stakeholders are aware of the potential impact on the company's financial position. Recording the liability or classifying it as a long-term liability is not appropriate unless the contingency becomes probable. Omitting the information is not in compliance with accounting standards and could be considered misleading.

When the Amount of a Contingent Liability Can Be Estimated