Jake Company is involved in a lawsuit. The liability which could arise as a result of this lawsuit should be recorded on the books if the probability of Jake owing money as a result of the lawsuit is which of the following?
A) Probable and the amount can be reasonably estimated.
B) Reasonably possible and the amount can be reasonably estimated.
C) Probable and the amount cannot be reasonably estimated.
D) Remote and the amount can be reasonably estimated.

Question

Quizplus · Accepted Answer

According to accounting standards, a liability should be recorded on the books if it is probable (i.e., more likely than not) that an outflow of resources will be required to settle the obligation and the amount can be reasonably estimated. Option B is incorrect because a liability is not recorded when the probability is only reasonably possible. Option C is incorrect because the amount must be reasonably estimated. Option D is incorrect because a liability is not recorded when the probability is remote.

Jake Company Is Involved in a Lawsuit