Question

A contingent liability that is reasonably possible

a.should be recorded and disclosed.
b.should be recorded only.
c.requires no treatment.
d.should be disclosed only.

Answer 1

A contingent liability that is reasonably possible should be disclosed only in the financial statements, not recorded.

Step-by-step explanation:

In accounting, a contingent liability is a potential liability that may occur, depending on the outcome of an uncertain future event. The accounting treatment for contingent liabilities is determined by their likelihood. According to accounting standards, a contingent liability that is deemed to be reasonably possible should not be recorded in the financial statements as an actual liability. Instead, it should be disclosed only in the notes to the financial statements. Option D is correct .

The proper treatment for a reasonably possible contingent liability is to include it in the footnotes of the financial statements to ensure that users are aware of the potential risk. Recording such a liability in the financial statements is only required if the liability is determined to be probable and the amount can be reasonably estimated.

Answer 2

The answer is letter b, should be recorded only.

Step-by-step explanation:

"Contingent liability" is a kind of liability that could happen in the future in response to unforeseeable events. An example of this is warranty of a product. However, if a contingent liability is probable in the future and the liability's amount is reasonably estimable, then this should be recorded with a journal entry. This should also be disclosed in the financial statement's footnote.

However, in the case above, it is only reasonably possible. It didn't mention anything about the contingent liability's amount to be estimable, thus the answer is letter b.

Both recording and disclosing of the contingent liability ONLY happens when it satisfies both conditions of being probable in the future and being reasonably estimable.