Final answer:
A contingent liability should be disclosed in the financial statements' footnotes when the outcome is probable and the amount can be reasonably estimated (Option C). GAAP sets this framework to ensure investors and creditors are aware of potential future obligations that can impact a company's financial position.
Step-by-step explanation:
A contingent liability is a potential financial obligation that may occur depending on the outcome of a future event. In the context of financial statements, the generally accepted accounting principles (GAAP) determine when a contingent liability should be disclosed in the footnotes. The correct answer is: C) the outcome of the accounting event is deemed probable, and a reasonable estimation as to the amount can be made.
This is because, under GAAP, a contingent liability should be recorded in the financial statements when it is probable that the liability will occur and the amount can be reasonably estimated. If the outcome is not probable or the amount cannot be reasonably estimated, then the liability is only disclosed in the footnotes rather than recorded on the balance sheet. Examples of contingent liabilities include pending lawsuits, product warranties, or environmental cleanup obligations. The disclosure in the footnotes provides important information to investors and creditors about potential risks that could affect the financial position of the company in the future.