Unex Company Is an Accrual Basis Taxpayer

question 19

Multiple Choice

Unex Company is an accrual basis taxpayer. This year, an employee sued Unex for unlawful age discrimination, and the company's auditors required it to accrue a $500,000 liability for the estimated expense of settling this lawsuit. Which of the following statements is true?

• A) Unex can deduct the accrued expense only if it makes a written disclosure to the IRS of the contingent liability.
• B) Unex will be allowed a deduction in the year in which its liability for the settlement becomes fixed and the amount of the settlement can be estimated with reasonable accuracy.
• C) Unex will be allowed a deduction in the year that it actually pays the settlement to the employee.
• D) Unex can never deduct any expense in connection with this lawsuit.

Understand the behavior of fixed and variable costs in relation to production levels.

Distinguish between committed and discretionary fixed costs.

Identify the characteristics and examples of variable costs.

Understand the concept of the relevant range and its application to costs.

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Definitions:

Recognizable Brand Name

A brand name that is widely known among the public and is easily recalled or recognized due to its reputation or marketing.

Monopoly Power

Refers to the ability of a firm or entity to control the market price and output of a product or service, due to lack of competition.

Perfect Competitor

An individual or firm operating in a perfect competition market structure, unable to influence the market price and thus takes it as given.

Essential Resource

A fundamental input or commodity that is considered vital for the production of goods and services and the functioning of an economy or ecosystem.