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

Question

Quizplus · Accepted Answer

If a contingent liability meets the criteria of being probable and the loss amount can be reasonably estimated, it must be recognized as an actual liability in the financial statements. Disclosing in footnotes is not enough and not accruing the liability is also not appropriate. Therefore, choice D is the best option.

If a Potential Loss on a Contingent Liability Is Probable