The Music House issues a contract to a new recording artist to produce a number of albums over the next five years at $1 million per album.This situation is an example of:
A)A contingent liability which should be recorded in the accounting records.
B)A contingent liability requiring footnote disclosure.
C)An estimated liability,since the number of albums to be produced is not yet determined.
D)A commitment which,if material,may be disclosed in a footnote.

Question

Quizplus · Accepted Answer

The situation described in the question is a commitment which, if material, may be disclosed in a footnote. It is not a liability since payment has not been made yet, and it is not contingent because the terms of the contract have already been established. However, since the contract is significant, it should be disclosed in the financial statements as a commitment.

The Music House Issues a Contract to a New Recording