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