Log inSign up
CPA Financial Accounting and Reporting Far · Question of the Day

CPA Financial Accounting and Reporting Far Question of the Day

A fresh daily question to build accuracy, reinforce recall, and turn practice into a steady habit.
Friday, September 18, 2026

A company has an accrued litigation liability of $500,000 at year-end. New information received before the financial statements are issued indicates the actual settlement will be $200,000. What is the appropriate accounting treatment?

Keep practicing CPA Financial Accounting and Reporting Far

Question of the Day

Answer today's CPA Financial Accounting and Reporting Far question, reveal the full explanation, then keep the streak going with a new question every day.

A company has an accrued litigation liability of $500,000 at year-end. New information received before the financial statements are issued indicates the actual settlement will be $200,000. What is the appropriate accounting treatment?

  1. Reduce the accrual to $200,000; the new information relates to conditions existing at the balance sheet date. (correct answer)
  2. Keep the $500,000 accrual; changes are recognized only in future periods.
  3. Reverse the full $500,000 accrual and record $200,000 in the next period.
  4. Average the two estimates and record $350,000.

Explanation: New information received after the balance sheet date but before financial statement issuance that provides evidence of conditions existing at the balance sheet date is a recognized subsequent event under ASC 855. The accrual is adjusted to $200,000. Answer A is correct. Answer B ignores Type I subsequent event guidance. Answer C reverses and defers, creating a period mismatch. Answer D has no basis in GAAP.