When a Company Has a Contingent Liability That Is Remote

question 45

Multiple Choice

When a company has a contingent liability that is remote in likelihood,the company should:

• A)include a description in the notes to the financial statements.
• B)record the amount of the liability times the probability of its occurrence.
• C)record the amount of the liability as a long-term liability on the balance sheet.
• D)exclude the information about the contingent liability from its financial statements and notes.

---

Definitions:

Risk Aversion

The reluctance or avoidance of undertaking investment with uncertain outcomes, preferring outcomes that are more predictable.

Owner-Manager

An individual who both owns a significant part of a company and is actively involved in its management.

Agency Relationship

A situation where one party, known as the agent, is authorized to act on behalf of another, called the principal, in dealing with third parties.

Normative Theories

Theoretical frameworks that prescribe how accounting processes should be conducted based on values, ethics, and ideal practices.