Contingent liabilities must be recorded in the financial statements if:

• A. The liability is possible but cannot be estimated.
• B. It is probable that a future event will confirm the liability and the amount can be reasonably estimated.
• C. The likelihood of the liability occurring is remote.
• D. The liability is only disclosed in the notes regardless of probability or estimability.

Answer: (B)

Verified step by step guidance

1. Understand the concept of contingent liabilities: Contingent liabilities are potential obligations that may arise depending on the outcome of a future event. They are classified based on the likelihood of occurrence and whether the amount can be reasonably estimated.
2. Review the criteria for recording contingent liabilities: A contingent liability must be recorded in the financial statements if it is probable that a future event will confirm the liability and the amount can be reasonably estimated.
3. Differentiate between recording and disclosure: If the liability is possible but cannot be estimated, or if the likelihood of occurrence is remote, it is not recorded in the financial statements but disclosed in the notes to the financial statements.
4. Apply the correct accounting treatment: For contingent liabilities that meet the criteria of being probable and reasonably estimable, they are recorded as a liability on the balance sheet and an expense in the income statement.
5. Ensure proper documentation: When recording or disclosing contingent liabilities, provide clear and detailed notes in the financial statements to inform users about the nature, timing, and uncertainty of the liability.