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Topic
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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!
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