In May of 2013, Truman Financial Services became involved in a penalty dispute w

Question

In May of 2013, Truman Financial Services became involved in a penalty dispute with the EPA. At December 31, 2013, the enviromental attorney for Truman 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 financial statements had been published, Truman accepted an EPA settlement offer of $2,000,000. What amount should Truman have reported an accrued liability on its December 31, 2013, balance sheet?

Explanation / Answer

The GAAP states that it is required to record provisions in the books, if the occurence of occuring is probable and the amount can be estimated with reasonable certainity.

Here, in this case , the company can record a provision of 1170000 when the occurence was determined, however , at year end ,since the settlement was decided to take place at $2000000 , the earlier provision has to be reversed and an accrued liabilty on account of settlement should be expensed in the books of $2000000.

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