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

(c) What is the appropriate accounting in this situation?

Short answer

The appropriate net income for 2017 and 2018 is $38,000.

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.

Appropriate accounting in the given situation

According to the accounting principles, the company should disclose $5,000 aswarranty expenses each year, resulting in a$38,000 net income for both years, i.e., 2017 and 2018.

Presentation of appropriate accounting

Proposed Accounting	2014	2015	2016	2017	2018
Income before warranty expense				$43,000	$43,000
Warranty expense				$5,000	$5,000
Net income	$20,000	$25,000	$30,000	$38,000	$38,000