Question

Which of the following circumstances would result in a disclosure of a contingent liability?

I: An event has caused the possibility of a sacrifice of future economic benefits, but the likelihood is remote.
II: A present obligation has been determined and the future sacrifice of economic benefits is probable and may be reliably measured.
III: The occurrence of an event has resulted in a probable sacrifice of future economic benefits, but the amount cannot be reliably measured.
IV: As a consequence of an event, a present obligation exists but the future sacrifice of economic benefits is unlikely.

A. I and III only
B. I and IV only
C. II and III only
D. III and IV only

Answer 1

Contingent liabilities are disclosed when there is a present obligation with a probable future sacrifice of economic benefits and either the amount can be reliably measured, or it cannot be measured. The correct answer is C. II and III only.

Step-by-step explanation:

The disclosure of a contingent liability depends on the circumstances of the obligation and the likelihood of an outflow of economic benefits to settle it. According to accounting standards, a contingent liability is disclosed when:

• A present obligation exists due to past events.
• The outflow of economic benefits to settle the obligation is probable.
• The amount of the obligation can be reliably estimated.

Therefore, the correct circumstances for the disclosure of a contingent liability are captured in II and III, where:

• II details a present obligation with both a probable future sacrifice and a reliably measurable amount.
• III describes a probable sacrifice of future economic benefits, even though the amount cannot be reliably measured.

Options I and IV describe scenarios where either the likelihood of the obligation leading to an economic outflow is remote or unlikely, and thus these do not meet the criteria for disclosure. Consequently, the correct answer to the question is C. II and III only.