In May of 2018, Raymond Financial Services became involved in a penalty dispute with the EPA. At December 31, 2018, 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 2018 financial statements were issued, Raymond accepted an EPA settlement offer of $900,000. Raymond should have reported an accrued liability on its December 31, 2018, balance sheet of:

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The environmental attorney indicated that an unfavorable outcome to the dispute was probable at December 31, 2018. Therefore, Raymond was required to accrue a liability for the estimated amount of the penalty, which was between $770,000 and $1,170,000. However, as Raymond accepted a settlement offer of $900,000 after the year-end, the accrued liability should be reduced to reflect the settlement amount. Thus, the accrued liability on December 31, 2018, should be $900,000, which matches the settlement amount.

In May of 2018, Raymond Financial Services Became Involved in a Penalty