A company switched from the cash basis to the accrual basis for recognizing warr

Question

A company switched from the cash basis to the accrual basis for recognizing warranty expense. The unrecorded liability for warranties was $1.5 million at the beginning of the year. Its tax rate is 30%. The company booked a year-end warranty liability of $2 million. As a result of this change, the firm would (Compute your answers in millions of dollars.): Report a prior period adjustment decreasing retained earnings by $450,000. Report a prior period adjustment decreasing retained earnings by $1,050,000. Report a current period charge decreasing net income by $1,050,000. Report a current period charge decreasing net income by $450,000. References Multiple ChoiceDifficulty: 2 Medium

Explanation / Answer

Option 2 is correct :Report a prior period adjustment decreasing retained earnings by $1,050,000.

( Because warranty expense is a tax deductible expenditure = $1500000(1 - .30) = $1500000*.7 = $1050000 .

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