Question

Which of the following is TRUE of a contingent liability?

- It is a potential liability that depends on a future event.
- It is an actual liability that is difficult to estimate.
- It is an actual liability that depends on a past event.
- It is a liability resulting from a lawsuit settled in court.

Answer 1

A contingent liability is a potential liability that depends on a future event. It is recorded if the event is likely and the amount can be estimated; otherwise, it's disclosed in the financial statement footnotes.

Step-by-step explanation:

The statement that is TRUE of a contingent liability is: It is a potential liability that depends on a future event. A contingent liability is recognized in the accounting records if the event is likely to occur and the amount of the liability can be reasonably estimated.

If the future event is only possible (not probable), or the amount cannot be estimated, then it is disclosed in the footnotes of the financial statements rather than recorded as an actual liability.