Star Company has a contingent liability that has a likelihood of actual occurrence that is classified as probable. Also, the amount of the liability can be reasonably estimated. Under these circumstances, Star is required to
A)recognize a liability only.
B)recognize an expense only.
C)recognize a liability and an expense in its financial statements.
D)disclose but not recognize the liability or the expense.

Question

Quizplus · Accepted Answer

When a contingent liability is classified as probable and the amount can be reasonably estimated, the company must recognize both a liability and an expense in their financial statements. This is in accordance with the accrual accounting principle of matching expenses with revenues. Disclosure alone is not sufficient in this case.

Star Company Has a Contingent Liability That Has a Likelihood