Uncertain Tax Positions MCQ

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  • #196354
    levhelm
    Member

    At the end of the current year, Swen Inc. prepares its tax return, which reflects an uncertain amount, reducing the firm’s tax liability by $40,000. Swen estimates that, upon audit by the IRS, there is a 20% chance that the full $40,000 benefit will be upheld, and a 40% chance that the benefit will be only $25,000. As a result of the required recognition and measurement principles for uncertain tax positions, current-year income tax expense is reduced by what amount?

    A. $18,000

    B. $25,000

    C. $40,000

    D. $15,000

    The answer is $25,000. CPAexcel’s explanation says that this is because there is a greater than 50% chance that it is $25,000. I don’t understand how it is greater than 40%.

    I’m lost here. Can somebody help me understand this? Thanks!

    Passed

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  • #688069
    greg2015
    Member

    I understand the confusion. It is greater than 40% because you have to consider both outcomes listed. In either outcome, the tax benefit will be at least $25,000. Therefore, there is a 60% probability (20% from outcome 1 plus 40% from outcome 2) that the tax benefit will be at least $25,000. This is the largest benefit that is more likely than not (50%) of being realized.

    AUD: 99
    FAR: 95
    BEC: 89
    REG: 87

    AICPA Ethics: 91

    Licensed Illinois CPA

    #688070
    levhelm
    Member

    You explained this very clearly. Thanks!

    Passed

    #688071
    greg2015
    Member

    You're welcome! Glad I could help.

    AUD: 99
    FAR: 95
    BEC: 89
    REG: 87

    AICPA Ethics: 91

    Licensed Illinois CPA

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