Financial Accounting and Reporting-CPA Practice Exam 2025 - Free CPA Practice Questions and Study Guide

To record a probable loss contingency before the issuance of financial statements, it is essential that the loss is reasonably estimated. This criterion ensures that the financial statements reflect a realistic and truthful picture of the company's financial position. If a loss contingency is probable but the amount cannot be reasonably estimated, it cannot be recorded in the financial statements. Instead, it may only need to be disclosed in the notes if it’s not deemed remote.

The nature of a contingent liability typically involves uncertainty regarding whether it will materialize or the timing and amount involved. Thus, only when there is sufficient information to provide a reasonable estimate can the company recognize the contingent loss in its financial statements. This recognition aligns with the principles of conservatism in accounting, where anticipated losses are recorded in a timely manner to present a fair view of the company’s financial health and performance.

Choosing other options does not reflect the fundamental concepts governing contingencies. For instance, the fixed amount condition is overly restrictive and does not consider the nature of many contingencies, which may not have a specific or fixed amount until they are resolved. A disclosure might occur even if the amount of the loss is not specifically determined, as long as the event itself is probable. The time frame being within the next year is also