Question

A contingent liability should be recorded in a company's financial statements only if the likelihood of a loss occurring is__________.

a. At least reasonably possible and the amount of the loss is known.
b. At least remotely possible and the amount of the loss is known.
c. At least reasonably possible and the amount of the loss is reasonably estimable.
d. Probable and the amount of the loss can be reasonably estimated.

Answer 1

Answer: Option D

Explanation: In simple words, contingent liability refers to those liabilities the arise of which depends on some event that may or may not happen in the future. Potential lawsuits and warranties on products sold are some of the many examples of contingent liabilities.

These liabilities are recorded so that the firm can make suitable reserves and funds in advance to tackle thee liabilities but they are only recorded when the amount of loss can be reasonably estimated and it is probable that liability will arise.