When the amount of a contingent liability can be estimated and it is likely,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 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 it is likely, the company must record the liability and its estimated amount on the balance sheet. This is because it meets the criteria of being a loss contingency, which requires recognition on the balance sheet when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Omitting the information is not an acceptable practice, and including a description in the footnotes is insufficient. Recording the estimated amount times the probability of occurrence would only be appropriate if the probability was less than likely.

When the Amount of a Contingent Liability Can Be Estimated