(L.O. 1) A company has a contingency. If it is probable that an actual liability exists at the balance sheet date, but the amount is not reasonably estimable, the contingent liability should be:
Approach and Explanation: Briefly review in your mind the guidelines for reporting contingent liabilities:
If it is probable that a loss will occur and the amount is estimable, accrue the loss and report the liability on the face of the balance sheet.
If it is only reasonably possible a loss will occur, or if it is probable but not estimable, disclose only in the notes.
If the loss is remotely possible, it need not be disclosed or accrued.
(Solution = c.)
TIP: In the context of accounting for contingencies, probable means “likely;” remotely possible means “not likely”; reasonably possible means “less than likely and more than remote.”
(L.O. 1) An example of a contingent liability is:
Approach and Explanation: Mentally define contingent liability and think of examples before you read the alternative answer selections. A contingent liability is a situation involving uncertainty as to possible loss or expense that will ultimately be resolved when one ...