CLO
Groupwork
Earnings Management Bobek Inc. has recently reported steadily
increasing income. The company reported income of $ in $ in and $ in
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 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 $ 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 $ Specifically, by recording a $ 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
a What is earnings management?
b Assume income before warranty expense i isthe effer oth and and that total warranty expense over the year period is What is the etect of the proposed accounting in In
c What is the appropriate accounting in this situation?
