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 liability and estimated amount of the loss 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 can be estimated and its likelihood is possible but not probable, the company should include a description in the footnotes to the financial statements. This disclosure is important for investors and other stakeholders to have a full understanding of the company's financial position. However, recording the liability on the balance sheet is not appropriate unless the likelihood of occurrence is probable. Likewise, multiplying the amount by the probability of occurrence is not an appropriate method for reporting this information. Omitting the information altogether would be misleading and not in compliance with generally accepted accounting principles.

When the Amount of a Contingent Liability Can Be Estimated