In Accounting for a Contingent Liability, If the Likelihood of the Obligation

question 42

Multiple Choice

In accounting for a contingent liability, if the likelihood of the obligation is possible, a company must

• A) recognize the liability and report it on the balance sheet.
• B) provide disclosure in the footnotes to the financial statements.
• C) not recognize or disclose the liability until it is certain and the exact amount is known.
• D) do nothing.

---

Definitions:

Non-Controlling Interest

The share of ownership in a subsidiary that cannot be directly or indirectly ascribed to the parent company.

Long Term Investments

Investments not expected to be sold or converted into cash within the next year, including stocks, bonds, and real estate.

Fair Value

The estimated price at which an asset or liability could be traded in a fair transaction between knowledgeable, willing parties under no force of sale.

Identifiable Net Assets Method

A technique used in business combinations that involves valuing a company based on the fair value of its identifiable net assets, excluding goodwill.