In May of 2009, Raymond Financial Services became involved in a penalty dispute with the EPA. At December 31, 2009, 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 2009 financial statements were issued, Raymond accepted an EPA settlement offer of $900,000. Raymond should have reported an accrued liability on its December 31, 2009, balance sheet of:

Question

Quizplus · Accepted Answer

An accrued liability should be recorded when a loss is probable and the amount can be reasonably estimated. In this case, Raymond's attorney indicated that an unfavorable outcome was probable and the estimated loss was between $770,000 and $1,170,000. However, since Raymond accepted a settlement offer of $900,000 after year-end but before the financial statements were issued, this amount should be recorded as the accrued liability on the December 31, 2009, balance sheet. Therefore, the correct answer is B.

In May of 2009, Raymond Financial Services Became Involved in a Penalty