Question

During the current year, Haft Co. became involved in a tax dispute with the IRS. At December 31, Haft’s tax advisor believed that an unfavorable outcome was probable. A reasonable estimate of additional taxes was $200,000 but could be as much as $300,000. After the financial statements were issued, Haft received and accepted an IRS settlement offer of $275,000. What amount of accrued liability should Haft have reported in its December 31 balance sheet?

Answer 1

Answer:

A) $200,000

Explanation:

In this case, Haft has a wide range of possible losses, between $200,000 to $300,000. Since no amount is more probable than others, then the company can decide to report the lowest estimate as long as all the other estimates have the same probability of happening. But if another estimate was probable, e.g. $220,000, then that estimate should be recorded even if it was higher.