Question

Which of the following is the proper treatment for a contingency that is probablo but the exact amount of which is not known? The amount can bo estimated.

A. The Hability should be reported in the notes to the fancial statements
B. The ability should be doubled following conservatism
C. The liability should be ignored
D. The hablity should be estimated and recorded.

Answer 1

The correct treatment for a probable contingency where the amount can be estimated is to record the liability on the financial statements, ensuring the accuracy and completeness of the organization's financial position.

Step-by-step explanation:

When dealing with a contingency that is probable but the exact amount is not known, the correct treatment is that the liability should be estimated and recorded. This approach is guided by the accounting principle of accrual, which requires that expenses and liabilities be recognized when they are incurred, not necessarily when payment is made. Although the exact amount may not be known, if the amount can be reasonably estimated, it should be recognized in the financial statements. This helps ensure that the financial statements provide a complete and accurate picture of the organization's financial position to users.

Doing otherwise, such as ignoring the liability or not reporting it in some form, would misrepresent the financial health of the business. Reporting the liability in the notes to the financial statements is also required to provide additional information about its nature and potential financial impact.