ABC Company has a bonus arrangement that gives the financial vice president and
ID: 2498468 • Letter: A
Question
ABC Company has a bonus arrangement that gives the financial vice president and 9 other executives a $15,000 bonus, if the net income exceeds the previous year’s by $1,000,000. Noting that the current financial statements report an increase of $950,000 in the net income, the Vice President asks Gene Baker, the controller, to reduce the estimate of warranty expense by $60,000. The present estimate of warranty expense is $500,000 and is known by both the Vice President and Gene Baker to be an estimated amount. If it is lowered for the current year, it can be raised for the following year so that the total amount of warranty expenses will be covered by the end of the following year.
Should Gene Baker lower the estimate?
Would anyone be harmed by the change in estimate?
Explanation / Answer
Gene Baker should lower the estimate if it thinks it fit to do so.
No one would be harmed by this change as per IAS 8 accounting policies, change in accounting estimates and errors:
The estimates have a prospective effect and they do not change anything retrospectively
so the change of estimate of warranty expenses would not mke any difference.