Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

9. Current Liabilities

Contingent Liabilities

Financial Accounting

9. Current Liabilities

Contingent Liabilities

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Multiple Choice

How should a contingent liability that is reasonably possible be reported in the financial statements?

It should be disclosed in the notes to the financial statements.

It should be recognized as an expense in the income statement.

It should be recognized as a liability on the balance sheet.

It should not be reported or disclosed.

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Verified step by step guidance

Understand the concept of contingent liabilities: A contingent liability is a potential obligation that may arise depending on the outcome of a future event. It is classified based on the likelihood of occurrence: probable, reasonably possible, or remote.

Review the accounting treatment for contingent liabilities: If the likelihood is probable and the amount can be reasonably estimated, it is recognized as a liability on the balance sheet. If the likelihood is reasonably possible, it is disclosed in the notes to the financial statements. If the likelihood is remote, it is neither recognized nor disclosed.

Analyze the scenario in the problem: The contingent liability is described as 'reasonably possible,' which means it does not meet the criteria for recognition as a liability on the balance sheet or as an expense in the income statement.

Determine the appropriate reporting method: Since the likelihood is reasonably possible, the correct treatment is to disclose the contingent liability in the notes to the financial statements. This provides transparency to users of the financial statements without overstating liabilities.

Conclude the reporting requirement: The contingent liability should be disclosed in the notes to the financial statements, as this aligns with the accounting standards and ensures proper communication of potential obligations to stakeholders.