A contingent liability must be accrued as a liability when the loss is:

• A. remote and the amount is unknown
• B. probable and the amount can be reasonably estimated
• C. possible but not probable
• D. probable but the amount cannot be reasonably estimated

Answer: (B)

Verified step by step guidance

1. Understand the concept of contingent liabilities: A contingent liability is a potential obligation that may arise depending on the outcome of a future event. It is not recorded in the financial statements unless certain conditions are met.
2. Review the criteria for recognizing a contingent liability: According to accounting standards (e.g., GAAP or IFRS), a contingent liability must be accrued as a liability when it is both probable that a loss will occur and the amount of the loss can be reasonably estimated.
3. Analyze the options provided in the problem: Evaluate each scenario to determine whether it meets the criteria for accruing a contingent liability. For example, 'remote and the amount is unknown' does not meet the criteria because the likelihood of occurrence is too low.
4. Focus on the correct answer: The correct scenario is 'probable and the amount can be reasonably estimated,' as this satisfies both conditions for recognizing a contingent liability in the financial statements.
5. Understand the implications: When a contingent liability is accrued, it is recorded as an expense in the income statement and a liability in the balance sheet, ensuring the financial statements reflect the potential obligation.