During 2020, A company became involved in a tax dispute with the IRS. Attorneys have indicated that they believe it is probable that their client will lose this dispute. They also believe that the company will have to pay the IRS between $900,000 and $1,400,000. After the 2020 financial statements were issued, the case was settled with the IRS for $1,200,000. What amount, if any, should be reported as a liability for this contingency as of December 31, 2020?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Problem Set 2

Presented below are three independent situations. Answer the question at the end of each situation.

A scenario: During 2020, A company became involved in a tax dispute with the IRS. Attorneys have indicated that they believe it is probable that their client will lose this dispute. They also believe that the company will have to pay the IRS between $900,000 and $1,400,000. After the 2020 financial statements were issued, the case was settled with the IRS for $1,200,000. What amount, if any, should be reported as a liability for this contingency as of December 31, 2020?

 

B scenario: On October 1, 2020, a pharmaceutical company was identified as a potentially responsible party by the Environmental Protection Agency. Management along with its counsel have concluded that it is probable that they will be responsible for damages, and a reasonable estimate of these damages is $5,000,000. An insurance policy of $9,000,000 has a deductible clause of $500,000. How should the pharmaceutical company report this information in its financial statements on December 31, 2020?

 

C scenario: a manufacturing plant in Sudan, which was destroyed in the civil war. It is not certain who will compensate the company for this destruction, but it has been assured by governmental officials that it will receive a definite amount for this plant. The amount of the compensation will be less than the fair value of the plant, but more than its book value. How should the contingency be reported in the financial statements?

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