MC Qu. 79 LO 20-06 A company switched from the cash basis to the accrual basis f
ID: 2500876 • Letter: M
Question
MC Qu. 79 LO 20-06 A company switched from the cash basis to the accrual basis for...
A company switched from the cash basis to the accrual basis for recognizing warranty expense. The unrecorded liability for warranties was $2.4 million at the beginning of the year. Its tax rate is 30%. The company booked a year-end warranty liability of $3 million. As a result of this change, the firm would:
Report a current period charge decreasing net income by $720,000.
Report a current period charge decreasing net income by $1,680,000.
Report a prior period adjustment decreasing retained earnings by $720,000.
Report a prior period adjustment decreasing retained earnings by $1,680,000.
A company switched from the cash basis to the accrual basis for recognizing warranty expense. The unrecorded liability for warranties was $2.4 million at the beginning of the year. Its tax rate is 30%. The company booked a year-end warranty liability of $3 million. As a result of this change, the firm would:
Explanation / Answer
correct option is "D" -Report a prior period adjustment decreasing retained earnings by $1,680,000.
[This is so because warranty expense is a tax deductible expenditure = 2.4 (1 - .30) = 2.4*.7 = 1.68 million ]
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