Question

Melbourne Inc. is involved in a tax dispute with the national tax authority. Melbourne’s legal counsel indicates that there is a 70 percent likelihood that the company will lose this dispute and estimates that the amount the company will have to pay is between $500,000 and $700,000, with all amounts in that range being equally likely. What amount, if any, should Melbourne recognize as a provision related to this tax dispute?

Answer 1

Melbourne should recognize $600,000 as a provision related to this tax dispute.

Step-by-step explanation:

amount to be recognized as a provision related to this tax dispute

= ($500,000 + $700,000)/2

= $600,000

Therefore, Melbourne should recognize $600,000 as a provision related to this tax dispute.