Question

1. In May of 2013, Raymond Financial Services became involved in a penalty dispute with the EPA. At December 31, 2013, the environmental attorney for Raymond indicated that an unfavorable outcome to the dispute was probable. The additional penalties were estimated to be $770,000 but could be as high as $1,170,000. After the year-end, but before the 2013 financial statements were issued, Raymond accepted an EPA settlement offer of $900,000. Raymond should have reported an accrued liability on its December 31, 2013, balance sheet of:

A.$770,000.

B.$900,000.

C.$970,000.

D.$1,170,000.

Please Show your work

Answer 1

• Correct Answer = Option ‘B’ $ 900,000 should have been recorded as an accrued Liability on 31 Dec 2013.
• This is because, even though on 31 Dec 2013 the amount was not certain, by the time the financial statements were issued, the liability amount was known to be $ 900,000 as the same has been accepted an EPA settlement.
• This is an adjusting event occurring subsequent to financial statement date, and since it was probable and conditions for such liability existed on the balance sheet date, the same is to be recorded at $ 900,000