Question

Problem 4-01 b-c (Part Level Submission) In recent years, Swifty Inc. has reported steadily increasing income. The company reported income of $38,000 in 2017, $47,500 in 2018, and $57,000 in 2019. Several market analysts have recommended that investors buy Swifty Inc. shares because they expect the steady growth in income to continue. Swifty is approaching the end of its 2020 fiscal year, and it looks to be a good year once again. However, it has not yet recorded warranty expense. Based on prior experience, this year's warranty expense should be around $9,500, but some members of top management have approached the controller to suggest that a larger, more conservative warranty expense should be recorded this year. Income before warranty expense is $81,700. Specifically, by recording an $15,200 warranty accrual this year, Swifty could report an income increase for this year and still be in a position to cover its warranty costs in future years. (b) Your answer is correct. Calculate the effect of the proposed accounting in 2020 and 2021. Assume the same income before warranty expense for both 2020 and 2021, and total warranty expense over the two-year period of $19,000. 2020 2021 Proposed Accounting Income: Income before Warranty Expense 817001 81700 Warranty Expense 15200 3800 Income 66500 77000 SHOW SOLUTION LINK TO TEXT

Answer 1

	2020	2021
Income before Warranty Expense	81700	81700	(Income before warrany for both the years was given as same)
Warranty Expense	9,500	9,500
Income	72,200	72,200
As per appropriate accounting policies, warranty expense spread on the straight line basis. Hence,
2 year warranty expense of $19,000 was spread equally in two years amounting to 9500 each.