When the amount of a contingent liability cannot be estimated but its likelihood is 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 on the balance sheet.
D) omit the information about the contingent liability from its financial statements and footnotes.

Question

Quizplus · Accepted Answer

When the amount of a contingent liability cannot be estimated but its likelihood is probable, the company should include a description in the footnotes to the financial statements. This will provide disclosure of the potential liability to the users of the financial statements while still acknowledging that the exact amount cannot be determined at this time. Option B is not appropriate as recording an estimated amount without any basis would be misleading. Option C is not appropriate as the liability cannot be classified as a long-term liability without a reasonable estimate of the amount. Option D is not appropriate as omitting information about a probable contingent liability would be misleading to users of the financial statements.

When the Amount of a Contingent Liability Cannot Be Estimated