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 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 and its exact amount is not known, but the probability of loss is probable and the amount of loss can be estimated, the liability should be estimated and recorded. This is in accordance with the accrual accounting principle, which requires recognition of anticipated losses even if they are not yet fully determinable. Option A is not appropriate as conservatism should not result in overstating liabilities. Option C is not appropriate as ignoring a probable and estimable liability would result in misrepresentation of financial statements. Option D is not appropriate as disclosure in the notes is insufficient; the liability must be recorded in the financial statements.

Which of the Following Is the Proper Treatment for a Liability