Existing claims related to product warranties and litigation as of December 31, 2016, indicate that it is probable that a liability has been incurred. However, as of December 31, 2016, 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

According to accounting principles, if it is probable that a liability has been incurred but the amount cannot be reasonably estimated, the loss contingency should be disclosed in the financial statements but not accrued. This ensures that users of the financial statements are aware of the potential liability without the company recognizing an estimated amount that lacks a reasonable basis.

Existing Claims Related to Product Warranties and Litigation as of December