If a potential loss on a contingent liability is probable and amount of the loss can be reasonably estimated, the liability should be:
A) included in the financial statements as an actual liability.
B) disclosed in the auditor's report but not disclosed on the financial statements.
C) disclosed in footnotes but not accrued.
D) neither reported nor disclosed in footnotes.

Question

Quizplus · Accepted Answer

If a potential loss on a contingent liability is probable and amount of the loss can be reasonably estimated, the liability should be included in the financial statements as an actual liability. This is based on the accrual accounting principle that requires companies to recognize expenses and liabilities in the financial statements when they become probable and reasonably estimable. This is also in accordance with Generally Accepted Accounting Principles (GAAP).

If a Potential Loss on a Contingent Liability Is Probable