Question

Three conditions are required for a contingent liability to exist. Which of the following is not one of those conditions?

A) There is a potential future payment to an outside party or the impairment of an asset that resulted from an existing condition.
B) The outcome must be resolved by a third-party.
C) There is uncertainty about the amount of the future payment or impairment.
D) The outcome will be resolved by some future event or events.

Answer 1

The option that is not a condition for a contingent liability is 'The outcome must be resolved by a third-party.' The other options listed are actual conditions for a liability to be considered contingent under GAAP.

Step-by-step explanation:

The question involves the identification of conditions that do not pertain to a contingent liability. In accounting, a contingent liability is a potential obligation that may or may not become actual, depending on the outcome of a future event. The generally accepted accounting principles (GAAP) stipulate that certain conditions must be met for a liability to be classified as contingent.

The three conditions that must exist for a contingent liability are:

• There is a potential future payment to an outside party or the impairment of an asset that resulted from an existing condition.
• There is uncertainty about the amount of the future payment or impairment.
• The outcome will be resolved by some future event or events.

Choice B (The outcome must be resolved by a third-party) is not one of the conditions that define a contingent liability. The resolution could happen internally or externally and does not necessarily require a third party.