Which of the following is the proper treatment for a liability that exists, but the exact amount of which is not known? Assume the probability of loss is probable and the amount of the loss can be estimated.
A)The liability should be doubled following conservatism.
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

When a liability exists, but the exact amount is not known, it should be estimated and recorded. This is in accordance with the accrual accounting concept, which requires recognition of all probable losses, even if the exact amount is uncertain. Ignoring the liability or reporting it only in the notes to the financial statements is not appropriate, as it would not reflect the true financial position of the company. The conservative approach of doubling the liability is not justified, as it would overstate the liability and distort the financial statements.

Which of the Following Is the Proper Treatment for a Liability