Question

A company switched from the cash basis to the accrual basis for recognizing warranty expense. The unrecorded liability for warranties was $1.6 million at the beginning of the year. Its tax rate is 35%. The company booked a year-end warranty liability of $3 million. As a result of this change, the firm would:

Answer 1

Answer:

Report a prior period adjustment decreasing retained earnings by $1,040,000

Explanation:

Report a prior period adjustment decreasing retained earnings by $1,040,000

Dr Retained earnings $1,040,000

Dr Deferred tax liability $560,000

(35%×$1,600,000)

Cr Estimated warranty liability $1,600,000

Therefore As a result of this change, the firm would Report a prior period adjustment decreasing retained earnings by $1,040,000