Question

A company is involved in a lawsuit for which the contingent liability is remote. How should the liability be treated on the balance sheet?

a. It should be disclosed in the notes only.
b. It should not be recorded and need not be disclosed.
c. It should be recorded as a current liability.
d. It should be recorded as a long-term liability.

Answer 1

b. It should not be recorded and need not be disclosed.

Step-by-step explanation:

A contingent liability must be recorded in the balance sheet only if its outcome is very probable and the company can estimate its cost.

If the liability is only possible or its amount cannot be determined exactly, then it must be disclosed in the footnotes.

If the liability is only a remote outcome, or it is unlikely to happen, then it doesn't need to be recorded or disclosed.