Under state law, Acme may pay 3% of eligible gross wages or
it may reimburse the state directly for actual unemployment
claims. Acme believes that actual unemployment claims will be
2% of eligible gross wages and has chosen to reimburse the state.
Eligible gross wages are defined as the first $10,000 of gross
wages paid to each employee. Acme had five employees, each of
whom earned $20,000 during year 2. In its December 31, year 2
balance sheet, what amount should Acme report as accrued liability
for unemployment claims?

(a) The contingent unemployment claims liability is
both probable and reasonably estimable, so it must be accrued at
12/31/Y2. Acme’s reasonable estimate of its probable liability is
2% of eligible gross wages. Eligible gross wages are the first
$10,000 of gross wages paid to each of the five employees (5 ×
$10,000 = $50,000), so the accrued liability should be $1,000
(2% × $50,000). Note that the 3% rate is not used because Acme
has chosen the option to reimburse the state directly, and its best
estimate of this liability is based on 2%, not 3%.