Question

A contingent liability is recorded if which conditions are met?

a. there is a remote chance that a future loss will occur.
b. it is probable that a future loss will occur.
c. the amount of the loss can be reasonably estimated.

Answer 1

A contingent liability is recorded in a company's financial statements when it is probable that a future loss will occur and the amount of loss can be reasonably estimated. If a loss is not probable or the amount cannot be estimated, the contingency is disclosed in the notes to the financial statements instead. Therefore correct option is B and C

Step-by-step explanation:

A contingent liability is recorded on a company's financial statements if certain conditions are met. According to accounting standards, the two main conditions required for a contingent liability to be recorded are:

• It is probable that a future loss will occur (far more likely than not).
• The amount of the loss can be reasonably estimated.

If both conditions are met, the company must record the contingent liability on its balance sheet. An example of this could be a lawsuit where it is highly probable that the company will have to settle and pay out a quantifiable amount.

However, if the probability of the occurrence is remote, such as a natural disaster, or it's not possible to estimate the amount, the contingent liability is typically disclosed in the notes to the financial statements instead of being recorded as a liability.