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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Which of the following is true?

a. No journal entries or footnotes are necessary if the probability of a contingent liability is remote.

b. A contingent liability should always be recorded in the footnotes to the financial statements.

c. A contingent liability should always be recorded within the financial statements.

d. A company can choose to record a contingent liability either within its financial statements or in the footnotes to the financial statements.

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 true statement.

Explanation

Explanation for correct answer:

A contingent liability should always be recorded in the footnotes to the financial statements. Hence the correct option is b.

Explanation for incorrect answers:

a. A contingent liability should always be recorded in the footnotes to the financial statements; hence it’s not the correct option...

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