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zloy xaker [14]
3 years ago
7

During Year 5, Tedd Co. became involved in a tax dispute with the IRS. At December 31, Year 5, Tedd's tax advisor believed that

an unfavorable outcome was probable. A reasonable estimate of additional taxes was $400,000 but could be as much as $600,000. After the Year 5 financial statements were issued, Tedd received and accepted an IRS settlement offer of $450,000. What amount of accrued liability should Tedd have reported in its December 31, Year 5 balance sheet
Business
1 answer:
kkurt [141]3 years ago
5 0

Answer:

$400,000

Explanation:

Since at December 31, Year 5, Tedd's tax advisor believed that an unfavorable outcome was <u>probable</u>. And a <u>reasonable estimate </u>of additional taxes was $400,000 but could be as much as $600,000.

Although after the Year 5 financial statements were issued, Tedd received and accepted an IRS settlement offer of $450,000.

Tedd should have included an amount of $400,000 as accrued liability in its December 31, Year 5 balance sheet

The reason is that according to the International Financial Reporting Standards, a PROVISION must be made as long as the conditions below were obtainable at year end.

- Existing Condition (which in this case is the tax dispute with the IRS)

- Probable Cash Outflow (which Tedd's Tax adviser confirmed)

- Reliable Estimate of Outflow ( which the scenario stated ''A reasonable estimate of additional taxes was $400,000'')

Hence, such 'reasonable estimate is the appropriate amount for inclusion in the financial statements.

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Answer:

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Provided information,

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Therefore PVAF of 10% for third year end to 12th year end will be for $1

= \frac{1}{(1 + 0.10)^3} + \frac{1}{(1 + 0.10)^4} + \frac{1}{(1 + 0.10)^5} + \frac{1}{(1 + 0.10)^6} + ............. \frac{1}{(1 + 0.10)^1^2} = 5.078

Here 0.10 = 10% discount rate

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Present Value of $12,000 will be

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