Question

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 $764,000 but could be as high as $1,158,000. After the year-end, but before the 2018 financial statements were issued, Raymond accepted an EPA settlement offer of $888,000. Raymond should have reported an accrued liability on its December 31, 2018, balance sheet of:

Answer 1

$888,000

Step-by-step explanation:

Contingent liabilities must only be recorded in the financial statements if they are likely probable and they can be quantified. If they are only possible, or they cannot be quantified, then they must be disclosed but not recorded. If they are not possible to happen, then nothing should be done.

In this case, the agreement was reached before the financial statements were finished, adjustments are always made after December 31. So, the balance should include this agreement since it is both probable and it includes a definite quantity.