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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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When should a contingent liability be recognized?

a. When a reasonable estimation can be made

b. When the contingent liability is probable

c. neither a nor b

d. a and b

To determine

Concept introduction:

Liabilities:

Liabilities are the obligation of the business or amount payable by the business. Liabilities can current or long term. Current liabilities are liabilities payable within the short term or business cycle of the company, for example Accounts payable for purchases and utilities payable. Long term liabilities are liabilities payable in a long period/ years, for example long term loan.

A contingent liability is a future liability that is dependent upon happening or not happening of an uncertain future event. For example: Amount to be paid if the case running in the court is lost.

A contingent liability is recognized as a liability when it is probable and its reasonable amount can estimate. For example: Amount to be paid the company knows it has lost the case

To choose:

The correct option for the time when a contingency is recognized as a liability.

Explanation

Explanation for correct answer:

A contingent liability is recognized as a liability when it is probable and its reasonable amount can estimate. Hence the correct option is d.

Explanation for incorrect answers:

a. A contingent liability is recognized as a liability when it is probable and its reasonable amount can estimate; hence it’s not the correct option...

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