When the amount of a contingent liability can be estimated and its likelihood is probable, the company should:
A) include a description in the footnotes to the financial statements.
B) record the estimated amount of the liability times the probability of its occurrence.
C) record the estimated amount of the liability on the balance sheet.
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 and its likelihood of occurrence is probable, the company should record the estimated amount of the liability on the balance sheet as a liability. This is because there is a high likelihood that the liability will occur and the company is able to reasonably estimate the amount of the liability. Omitting this information would not accurately reflect the company's financial position and would be misleading to stakeholders. Including a description in the footnotes is also necessary for transparency, but it is not sufficient on its own. Recording the estimated amount of the liability times the probability of its occurrence would not be appropriate because it does not accurately reflect the company's actual liability.

When the Amount of a Contingent Liability Can Be Estimated