Young Company is involved in a lawsuit. The liability which could arise as a result of this lawsuit should be recorded on the books if the probability of Young owing money as a result of the lawsuit is:

Question

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As per accounting principles, a provision for a liability should be made if it is probable and the amount can be reasonably estimated. This means that if it is likely that the company will have to pay a certain amount of money as a result of the lawsuit, and this amount can be estimated with reasonable accuracy, then a provision should be made on the books. Choice A is also true, but it is only for remote possibilities. Choice C is for situations that are less likely than probable. Choice D is not correct because if the amount cannot be reasonably estimated, then no provision can be made.

Young Company Is Involved in a Lawsuit