The Bishop Company has a balance in the warranty obligation account of $400,000. An analysis of the products sold under warranty indicates that a balance of $900,000 should be adequate for this year-end. The president of Bishop Company directs that the balance be adjusted to $600,000. If more is needed, it will be adjusted next quarter. The president indicates that there is not adequate liquidity currently to pay more than $600,000.
Required
a. 1. Adjusting to $600,000 will add how much to expense for the current year?
2. Adjusting to $900,000 will add how much to expense for the current year?
b. If the balance in the warranty obligation account is not adequate, will this prevent
subsequent payments? Comment.
c. Comment on the ethics of not providing a balance that is reasonably close to what the
analysis indicates.