Which of the following is the proper treatment for a contingency that is probable but the exact amount of which is not​ known? The amount can be estimated.

Question

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Part 1
A.
The liability should be ignored.
B.
The liability should be estimated and recorded.
C.
The liability should be doubled following conservatism.
D.
The liability should be reported in the notes to the financial statements.

Answer 1

The proper treatment for a contingency that is probable but the exact amount is not known, though it can be estimated, is:

B. The liability should be estimated and recorded.

Under Generally Accepted Accounting Principles (GAAP), when a loss contingency is probable and can be reasonably estimated, it should be recognized in the financial statements by recording the estimated liability.