A Certain Contingent Liability Was Evaluated at Year-End, and Considered

question 139

Multiple Choice

A certain contingent liability was evaluated at year-end, and considered to have a reasonable possibility of becoming an actual liability. If the accountant decided not to report it in the notes to the financial statement, what effect would this have on the financial reporting of the company?

• A)There would be no effect.
• B)The liabilities on the balance sheet would be understated.
• C)The information about the transaction would be inadequately disclosed in the notes.
• D)The net income of the company would be understated.

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Definitions:

Liable

Legally responsible or answerable for an action or event, potentially subject to legal obligations or compensations.

Certificate of Deposit

A savings certificate with a fixed maturity date and specified fixed interest rate, often issued by banks.

Promissory Note

A financial document in which one party (the maker) promises to pay another party (the bearer) a definite sum of money, either on a specific date or upon demand.

Indorsement

An alternative spelling for endorsement; the act of signing one's name on a document to validate it or transfer its ownership.