Financial Accounting and Reporting-CPA Practice Exam

What amount of accrued liability should Tedd Co. report related to its tax dispute?

1. $400,000

2. $450,000

3. $500,000

4. $600,000

The correct answer is: $400,000

To determine the amount of accrued liability that Tedd Co. should report related to its tax dispute, it is essential to understand the nature of accrued liabilities, especially in the context of potential obligations arising from tax disputes. An accrued liability for taxes typically reflects the company's best estimate of the amount that it is obligated to pay based on current information about the dispute. In this scenario, if the available evidence indicates that Tedd Co. has a probable obligation related to the tax dispute and can reasonably estimate that obligation, it must report the liability at that estimated amount. The selection of $400,000 indicates that this amount is the company's best estimate based on the circumstances of the dispute. This could be due to factors such as interpretations of tax regulations, the likelihood of winning or losing the dispute, and potential settlements. Reporting this amount aligns with the accounting principles that state an obligation should be recognized when it is probable and the amount can be reasonably estimated. In regard to the other amounts, while they may represent different estimates or possible outcomes of the dispute, they do not reflect the most accurate representation of the company's liability based on the information at hand. Therefore, Tedd Co. appropriately recognizes an accrued liability of $400,000, which shows prudent financial reporting