Portage La Prairie Company is currently being audited by the tax authorities with respect to a deduction they claimed two years ago.If they are reassessed, the amount they will owe could be as high as $2,000,000.Their accountant has been unable to tell them how likely it is that they will owe the additional taxes.This is an example of which of the following?

Question

Quizplus · Accepted Answer

This situation is an example of a contingent liability because it is a potential liability that depends on the outcome of future events, specifically the outcome of the tax audit. Until the outcome is known, the amount owed is uncertain and cannot be recorded as an accrued liability. It also does not fall under the definition of a contingent asset, which would be a potential gain that depends on the outcome of future events. Finally, it is not a future income tax liability because it is related to a specific deduction claimed in the past, rather than a future tax obligation.

Portage La Prairie Company Is Currently Being Audited by the Tax