A contingent liability that is probable and can be reasonably estimated will immediately result in
A)an increase in both liabilities and stockholders' equity.
B)an increase in liabilities and a decrease in net income.
C)an increase in liabilities without any need for financial statement disclosure.
D)an increase in liabilities and a decrease in assets.

Question

Quizplus · Accepted Answer

The probable and reasonably estimable contingent liability will lead to an increase in liabilities as it is recognized in the financial statements as an obligation. This recognition will also result in a decrease in net income as the expenses related to the liability are recognized. Therefore, option B is the correct answer. Options A and D are incorrect as there is no net effect on stockholders' equity or assets. Option C is also incorrect as financial statement disclosure is required for significant contingent liabilities even if they are not probable or estimable.

A Contingent Liability That Is Probable and Can Be Reasonably