During 2021 your firm is engaged to provide services to a new client, Wonder Fall, Inc. You are working on preparing the federal income tax return for the year ended December 31, 2020, and as part of that process, you are looking at prior years’ returns to see what methods Wonder Fall has elected.

You notice that the Company has had an account called Accrued Product Liability for several years and that there is no book/tax difference reflected in the return (tax follows book treatment). You ask the client for more information, and you learn that they accrue estimates of the liabilities that are expected to result from recalls and product liability suits. Below is a summary of the balance in the account over the past several years:

12/31/2015 $100,000
12/31/2016 $225,000
12/31/2017 $350,000
12/31/2018 $555,000
12/31/2019 $675,000
12/31/2020 $800,000

Is the company on a correct method with respect to the Accrued Product Liability account?

If not, what action should be taken by the Company?

If necessary, calculate the Section 481(a) adjustment and the spread period, if any.

Answer rating: 100% (QA)

Answer 1 The term accrued liability refers to an expense incurred but not yet paid for by a Business ... View the full answer