For 2017, P Co. estimated its two-year equipment warranty costs based on $23 per unit sold in 2017. Experience during 2018 indicated that the estimate should have been based on $25 per unit. The effect of this $2 difference from the estimate is reported:

In 2018 income from continuing operations.

As an accounting change, net of tax, below 2018 income from continuing operations.

As an accounting change requiring 2017 financial statements to be restated.

As a correction of an error requiring 2017 financial statements to be restated.

Question

Business

Nayeli Mcintosh

25 September, 06:45

For 2017, P Co. estimated its two-year equipment warranty costs based on $23 per unit sold in 2017. Experience during 2018 indicated that the estimate should have been based on $25 per unit. The effect of this $2 difference from the estimate is reported:

In 2018 income from continuing operations.

As an accounting change, net of tax, below 2018 income from continuing operations.

As an accounting change requiring 2017 financial statements to be restated.

As a correction of an error requiring 2017 financial statements to be restated.

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Answers (1)

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Steven Davies · Answer 1

In 2018 income from continuing operations.

Explanation:

A variation in the accounting forecast impacts present and future periods and is not accounted for by repaying earlier periods. The adjustment in the warranty cost estimate is based on new information gained from experience which counts as an adjustment in the accounting estimate. The accounting change is part of continuing operations but is not recorded net of taxes.

Therefore first option is correct