In accounting for a contingent liability, if the likelihood of the obligation is probable but the amount cannot be estimated, a company must
A) recognize the liability and report it on the balance sheet.
B) provide disclosure in the footnotes to the financial statements.
C) not recognize or disclose the liability until it is certain and the exact amount is known.
D) do nothing.

Question

Quizplus · Accepted Answer

When the likelihood of the obligation is probable but the amount cannot be estimated, a company must provide disclosure in the footnotes to the financial statements. This is because the contingency is deemed material and has the potential to affect the decision making of users of the financial statements. Disclosure in the footnotes provides transparency and helps users to understand the nature of the contingent liability.

In Accounting for a Contingent Liability, If the Likelihood of the Obligation