Question

Capacitantes #3 EI estudiante re se presentan los cambios en principios contables en los estados financieros. SELECT THE BEST ANSWER (Shows computations are required) 1. A company switched from the cash basis to the accrual basis for recognizing warranty expense even though the warranty liability was always material. The unrecorded liability for warranties was $2 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: A. Report a prior period adjustment decreasing retained earnings by $600,000. B. Report a prior period adjustment decreasing retained earnings by $1,400,000. C. Report a current period charge decreasing net income by $600,000 D. Report a current period charge decreasing net income by $1,400,000. 2. In 2018, due to a change in marketing forecasts, Barney Corporation reduced the projected life of its patent for producing round dice. The cumulative patent amortization prior to 2018 would have been $10 million higher have the new life been used. Barney's tax rate is 30%. Barney's retained earnings as of December 31, 2018, would be A. Overstated by $7 million. B. Overstated by $3 million. C. Overstated by $10 million. D. Unaffected.

Answer 1

The correct option is 'B. Report a prior period adjustment decreasing retained earnings by $1,400,000'. The amount of $2,000,000 is not recorded for warranty liability. The ax rate is 30%. Retained earnings is overstated by $1,400,000 ($2,000,000 x (100%-3%) Thus, retained earnings would be decreased by S1,400,000 to adjust the prior period adjustment 2. The correct option is D. Unaffected' There is a change in estimate for the projected life of the patent. It would not be treated prospectively and not retrospectively. Thus, there would be no effect on retained earnings as prior period statements would not be affected by this change