Question

If a loss contingency is reasonably possible or the amount cannot be reasonably estimated,__________________.

A. Disclosure should occur in both the financial statements and the notes to the financial statements
B. Disclosure should occur in the financial statements only
C. Only a disclosure in the notes is required
D. Then no disclosure is required

Answer 1

When a loss contingency is reasonably possible or the amount cannot be reasonably estimated, it is required that only a disclosure in the notes to the financial statements is made, providing details about the nature and potential impact of the contingency.

Step-by-step explanation:

If a loss contingency is reasonably possible or the amount cannot be reasonably estimated, only a disclosure in the notes is required (Option C). This is stated under accounting principles, such as those established by the Financial Accounting Standards Board (FASB) under Generally Accepted Accounting Principles (GAAP).

When a loss contingency is not probable, or it is not possible to estimate the amount of the loss, the company should disclose the nature of the contingency, the possible effects, and the range of the potential loss in the notes to the financial statements. Full disclosure in the notes allows investors and other users of the financial statements to assess the potential future impact on the financial status of the company without cluttering the financial statements themselves.