Question

Which of the following accurately describes how contingent liabilities are reported on the Balance Sheet?

A. Contingent liabilities are not reported.

B. Contingent liabilities are reported in the liabilities section.

C. Contingent liabilities are disclosed in the footnotes only.

D. The accounting treatment for contingent liability could be A, B, or C depending on the likelihood of an actual obligation occurring.

Answer 1

Contingent liabilities are disclosed in the footnotes, and their accounting treatment depends on the likelihood of an actual obligation occurring.

Step-by-step explanation:

The correct answer is D. The accounting treatment for contingent liability could be A, B, or C depending on the likelihood of an actual obligation occurring.

Contingent liabilities are potential obligations that may arise in the future, depending on the occurrence or non-occurrence of certain events. They are not initially recorded on the balance sheet as they are uncertain in nature, but they are disclosed in the footnotes to the financial statements.

If a contingent liability is probable and its amount can be reasonably estimated, it is recorded in the liabilities section of the balance sheet. If it is reasonably possible but cannot be reasonably estimated, it is still disclosed in the footnotes. If it is remote, meaning the chance of occurring is very low, it is not reported.