Question

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. do nothing.
c. not recognize or disclose the liability until it is certain and the exact amount is known.
d. provide disclosure in the footnotes to the financial statements.

Answer 1

Answer: d. provide disclosure in the footnotes to the financial statements.

Explanation:

A contingent liability is an obligation that a company might owe in future depending on the outcome of an event such as a law suit.

To record a contingent liability in the books, two conditions must be satisfied;

1. Loss must be probable
2. Amount must be estimable

If these two conditions are not satisfied then the contingent liability may simply be disclosed as a footnote in the financial statement. The amount here is not estimable so can be disclosed as a footnote.

Answer 2

During an unpredictable event, the coverage for the damage to a third person in which the insured party is liable is a contingent liability. Examples are goods warranties, lawsuits etc.

The correct answer is:

Option d. provide disclosure in the footnotes to the financial statements.

This can be explained as:

• If during a trial or any event when the third party is insured then the owner business needs to remunerate the damage losses.

• For the contingent liability, the losses must be presumable and the damaged sum should be computable.

• If the above-stated circumstances are not satisfied then it is published in the footnote.

Therefore, the amount is disclosed in the footnote.

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