What is estimated liability: Choose the correct answer.

What is estimated liability: Choose the correct answer.

1. Is an unknown liability of a certain amount.

2. Is a known obligation of an uncertain amount that can be reasonably estimated.

3. Is a liability that may occur if a future event occurs.

4. Is not recorded until the amount is known for certain.

Answer: 2. Is a known obligation of an uncertain amount that can be reasonably estimated.

An estimated liability, also called provision, is another form of liability that is additional, recognized in the financial accounting when there is a present obligation arising from past events and it is reasonably sure that the entity will be needed to release resources to meet the obligations but the exact value of the obligation cannot be estimated.

These liabilities are recognized at the present value of the amount that is most likely to be paid in the process of eliminating responsibility at the relevant date. It is pointed out that the general nature of an estimated liability is that the obligation is clear while the amount needed to be paid to satisfy the obligation is unknown. It is however important to note that the amount tagged on the entity must be reasonably estimable based on some information and or professional judgment is made.