In accounting for a contingent liability, if the likelihood of the obligation is possible, 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

If the likelihood of the obligation is possible, a company must provide disclosure in the footnotes to the financial statements. This is because the liability is not yet certain and the exact amount is not known, so it cannot be recognized on the balance sheet. However, it is important for investors and stakeholders to be aware of the potential liability so that they can make informed decisions.

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