Question

Bobek Inc. has recently reported steadily increasing income. The company reported income of \(20,000 in 2014, \)25,000 in 2015, and \(30,000 in 2016. A number of market analysts have recommended that investors buy the stock because they expect the steady growth in income to continue. Bobek is approaching the end of its fiscal year in 2017, and it again appears to be a good year. However, it has not yet recorded warranty expense.

Based on prior experience, this year’s warranty expense should be around \)5,000, but some managers have approached the controller to suggest a larger, more conservative warranty expense should be recorded this year. Income before warranty expense is \(43,000. Specifically, by recording a \)7,000 warranty accrual this year, Bobek could report an increase in income for this year and still be in a position to cover its warranty costs in future years.

Instructions

(b) Assume income before warranty expense is \(43,000 for both 2017 and 2018 and that total warranty expense over the 2-year period is \)10,000. What is the effect of the proposed accounting in 2017? In 2018?

Short answer

The net income for 2017 and 2018 is$36,000 and $40,000 respectively.

Step-by-step solution

Meaning of Financial reporting

Financial reporting is one of the crucial processes of business activities. Under this process, a business entity discloses its financial data in the form of financial statements tointernal and external users.

Computation of effect of proposed accounting

Proposed Accounting	2014	2015	2016	2017	2018
Income before warranty expense				$43,000	$43,000
Warranty expense				$7,000	$3,000
Net income	$20,000	$25,000	$30,000	$36,000	$40,000

Effect of proposed accounting

The trend income of the company will increase if it makes manipulation the amount of warranty expenses. By showing more expenses in 2017, the company will be able to save income and maintaingrowthin the income.