Existing claims related to product warranties and litigation as of December 31, 2014, indicate that it is probable that a liability has been incurred. However, as of December 31, 2014, 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

Since it is probable that a liability has been incurred, the contingency should be disclosed in the financial statements. However, since the amount cannot be reasonably estimated, it cannot be accrued. Therefore, choice B is the best option: disclose but not accrue.

Existing Claims Related to Product Warranties and Litigation as of December