Which of the following is the proper treatment for a liability that exists,but the exact amount of which is not known?
A) The liability should be treated as a contingent liability.
B) The amount of the liability should be estimated and recorded.
C) The liability should be ignored.
D) The liability should be reported in the notes to the financial statements.

Question

Quizplus · Accepted Answer

If the exact amount of a liability is not known, it should be estimated and recorded. This is in accordance with the accrual accounting principle, which requires recognition of expenses and liabilities when they are incurred, not when they are paid. Ignoring the liability or reporting it only in the notes to the financial statements would not accurately reflect the company's financial position. Treating it as a contingent liability would be appropriate only if the likelihood and amount of the liability cannot be reliably estimated.

Which of the Following Is the Proper Treatment for a Liability