Financial Accounting and Reporting-CPA Practice Exam

What does a probable likelihood indicate regarding loss contingencies?

1. Liability is virtually certain

2. Future events are unlikely

3. Loss is expected to be realized

4. Loss is not expected to occur

The correct answer is: Loss is expected to be realized

A probable likelihood in the context of loss contingencies indicates that a loss is expected to be realized. This reflects an assessment that future events are more likely than not to occur, thus creating a strong basis for anticipating that a liability may arise. In accounting, when a situation is deemed probable, it means that there is a significant chance that the loss will materialize, and therefore, it's appropriate to recognize the loss in financial statements. Organizations are required to disclose such contingencies if they are probable and can be estimated reliably, which helps in providing a true and fair view of the financial position. The other choices do not accurately reflect the meaning of probable likelihood regarding loss contingencies. The idea of liability being virtually certain would relate more closely to losses classified as "likely" which would indeed require recognition on the balance sheet. When future events are unlikely, it implies that the loss does not need to be recognized, which is contrary to being classified as probable. Lastly, stating that the loss is not expected to occur directly opposes the definition of a probable outcome.