Existing claims related to product warranties and litigation as of December 31, 2010, indicate that it is probable that a liability has been incurred.However, as of December 31, 2010, the amount of the obligation cannot be reasonably estimated.Based on these facts, an estimated loss contingency should be
A)accrued
B)disclosed but not accrued
C)neither accrued nor disclosed
D)classified as an appropriation of retained earnings

Question

Quizplus · Accepted Answer

Based on the information given, it is probable that a liability has been incurred, but the amount cannot be reasonably estimated. Therefore, the best option would be to disclose the existence of the contingency in the financial statements, but not to accrue for a specific amount. Disclosing the information allows users of the financial statements to understand the potential impact of the liability on the company's financial position and performance. Choosing option A to accrue for an estimated loss would not be appropriate since an estimate cannot be reasonably determined. Option C to neither accrue nor disclose would not provide sufficient information to financial statement users. Option D to classify as an appropriation of retained earnings is not applicable since an estimate cannot be reasonably determined.

Existing Claims Related to Product Warranties and Litigation as of December