Asked by DELINA FILLI on Jun 18, 2024
Verified
Answer the following four questions.
A.What is a contingent liability?
B.When must a contingent liability be recorded through a journal entry?
C.When should a contingent liability be disclosed in the footnotes to the financial statements?
D.When is disclosure of a contingent liability not required?
Contingent Liability
A potential financial obligation that may arise depending on the outcome of a future event.
Journal Entry
A record in accounting that denotes a business transaction, including information on the accounts affected and whether they are debited or credited.
Footnotes
Additional information provided at the bottom of financial statements to provide more detail or clarify the data presented in the statements themselves.
- Recognize and account for contingent liabilities and their disclosure requirements.
Verified Answer
B.Whether or not the potential liability becomes a recorded liability depends upon the outcome of future events.For example,if a company is currently involved in a product liability lawsuit,then the company may have to pay the plaintiff if the settlement is unfavorable.A contingent liability must be recorded if it is probable that the future events will occur and the amount can be reasonably estimated.
C.Contingent liabilities should be disclosed in the notes to the financial statements if it is probable that future events will occur but the amount cannot be reasonably estimated.There should also be note disclosure if it is reasonably possible that the future events will occur,whether or not an amount can be reasonably estimated.
D.Disclosure is not required if the probability of future events occurring is remote.
Learning Objectives
- Recognize and account for contingent liabilities and their disclosure requirements.
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