MC Qu. 48 LO 13-06 In May of 2013, Raymond Financial Services... In May of 2013,
ID: 2502092 • Letter: M
Question
MC Qu. 48 LO 13-06 In May of 2013, Raymond Financial Services... 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 $763,000 but could be as high as $1,156,000. After the year-end, but before the 2013 financial statements were issued, Raymond accepted an EPA settlement offer of $886,000. Raymond should have reported an accrued liability on its December 31, 2013, balance sheet of: A$1,156,000 B$886,000. C$763,000. D$270,000
Explanation / Answer
An estimated loss from a loss contingency shall be accrued by a charge to income if both the following conditions are met :
a. Information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss.
b. The amount of loss can be reasonably estimated.
Raymond Financial services which became involved in a penalty dispute with EPA could estimate the additional penalties i.e loss to be $763000 but this could be as high as $1156000.So therefore raymond should have reported an accrued liability of $763000 as this is the amount which can be reasonably estimated
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