Homer Security Systems experienced an event that had the following effects on its financial statements. Which of the following events would have caused these effects?
A)Recognizing a contingent liability that has a remote chance of occurring
B)Recognizing a contingent liability that has a reasonably possible chance of occurring but is not estimable
C)Recognizing a contingent liability that has a probable chance of occurring and is estimable
D)All of the answers describe events that could have caused the effects shown in the financial statements model.

Question

Homer Security Systems experienced an event that had the following effects on its financial statements.  Which of the following events would have caused these effects?
A)Recognizing a contingent liability that has a remote chance of occurring 
B)Recognizing a contingent liability that has a reasonably possible chance of occurring but is not estimable 
C)Recognizing a contingent liability that has a probable chance of occurring and is estimable 
D)All of the answers describe events that could have caused the effects shown in the financial statements model.

Quizplus · Accepted Answer

The effects shown in the financial statements model are a decrease in net income, an increase in liabilities, and no effect on equity. These effects are consistent with recognizing a contingent liability that has a probable chance of occurring and is estimable. Option A is incorrect because recognizing a contingent liability that has a remote chance of occurring would not have a significant impact on financial statements. Option B is incorrect because recognizing a contingent liability that has a reasonably possible chance of occurring but is not estimable would likely have a significant impact on financial statements, including a possible decrease in equity. Option D is incorrect because option A and B do not match the effects shown in the financial statements model.

Homer Security Systems Experienced an Event That Had the Following