Question

May of 2016, Raymond Financial services became involved in a penalty dispute with the EPA. At Dec 31, 2016, the environmental attorney for Raymond indicated that an unfavorable outcome for the dispute was probable. The additional penalties for the dispute were estimated to be 770,000 but could be as high as 1.17 million. After the year end but before the 2016 financial statements were issued, Raymond accepted a settlement offer of 900,000. Raymond should report an accrued liability on the Dec 31, 2016 balance sheet of how much?

Answer 1

Raymond Financial Services should report an accrued liability of $900,000 on their Dec 31, 2016 balance sheet due to the acceptance of the settlement offer before the financial statements were issued.

Step-by-step explanation:

According to accounting principles, when a loss is probable and the amount can be reasonably estimated, a company must recognize the loss and a related liability. In the case of Raymond Financial Services, the attorney indicated that an unfavorable outcome was probable. Additionally, before the financial statements of 2016 were issued, the company accepted a settlement offer. Therefore, Raymond should report an accrued liability for the amount of the settlement, which is $900,000.