Question

Question: Under what conditions should a contingent liability be recorded?

Short answer

Answer

Contingent liability is recorded when:

1. It is likely to arise.
2. The amount can be estimated.

Step-by-step solution

Definition of Contingent Liability

Contingent liability can be defined as the obligation that depends upon the happening of any uncertain event in the future period. Such liabilities are recorded to ensure that the financial statements are accurate.

Conditions under which contingent liability is recorded

The business entity will record the contingent liability when the liability is likely to arise, and the obligation amount for the respective liability can be reasonably estimated.