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 $770,000 but could be as high as $1,170,000. After the year-end, but before the 2013 financial statements were issued, Raymond accepted an EPA settlement offer of $900,000. Raymond should have reported an accrued liability on its December 31, 2013, balance sheet of:

Question

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The environmental attorney indicated that an unfavorable outcome was probable, which means that a liability should be accrued. The estimated amount of the penalty was between $770,000 and $1,170,000, but before the financial statements were issued, Raymond accepted a settlement offer of $900,000. Therefore, the accrued liability should be reported as the settlement amount of $900,000. Choice A is incorrect because it represents the lower end of the estimated range and does not reflect the settlement amount. Choice C is incorrect because it adds the estimated penalty to the settlement amount, which would result in double-counting the liability. Choice D is incorrect because it represents the upper end of the estimated range and does not reflect the settlement amount.

In May of 2013, Raymond Financial Services Became Involved in a Penalty